The US created 379,000 robust jobs in February and the economy is ready to take off, but the best growth prospects may come at a cost in the short term.
In a word, inflation.
Make no mistake, inflation is still very low now and has been for the past decade. The coronavirus pandemic suppressed inflation at the beginning of last year, and even now, prices are rising by less than 2% a year.
Reading: Inflation concerns are back. Should you be concerned?
The loss of so many jobs during the pandemic – almost 10 million are still missing – and the resulting drop in demand are also helping to contain inflation.
“It is difficult, if not impossible, to generate sustained inflation and higher inflation expectations when the economy is still so far from full employment,” said chief economist Scott Anderson of Bank of the West.
To see: A visual view of how an unfair pandemic reshaped work and home
That could change in the coming months. Because? Increase in oil prices. Shortage of raw materials and other important supplies, such as wood and semiconductors. And another round of massive government financial aid to Americans.
After dropping to almost zero last May, the annual increase in the consumer price index rose to 1.4% in January – and is expected to continue to rise. The CPI is the government’s main tool for monitoring the cost of living and determining how much to increase Social Security benefits each year, among other things.
Economists predict that the CPI will rise 0.3% in February, pushing the annual rate up to 1.7%. The report, which comes out next Wednesday, is the highlight of the week with a light economic calendar.
To see: MarketWatch Economic Calendar
In the summer, many economists estimate that the cost of living will rise above 2% a year and exceed the Federal Reserve’s 2% target.
Evidence of rising prices is increasing. A couple of reports from ISM purchasing managers last week, for example, showed that companies are paying much higher prices for a wide range of supplies they need to produce goods and services.
A price barometer for business supplies skyrocketed to a 10-year peak, prompting a wholesale executive to worry about “a continuous influx of price increases due to shortages of raw materials, shortages of labor and delays in transportation. “.
Then there are oil prices. The cost of oil has risen 25% since the beginning of January, after Saudi Arabia and other suppliers outside the United States cut production. This is also driving higher prices.
Throwing fuel into the fire represents almost $ 2 trillion in new financial aid from Washington at a time when the economy appears to be accelerating. The Democratic-led Congress and the White House are expected to approve the bill in a matter of days.
The result is that inflation will certainly increase in the coming months. The big question is: is it just a temporary phenomenon linked to a total reopening or to the economy? Or something worse that will endure?
Fed chairman Jerome Powell and most central bank officials are betting that price increases will not last. Powell has repeatedly predicted that the expected increase in inflation will decrease and pose no threat to the economy.
The danger, warn some economists, is that rising inflation will create more uncertainty among investors, raise interest rates and potentially hamper the economic recovery.
Home sales, car sales and many other consumer and business activities have benefited greatly from the very low interest rates. Not to mention the record stock market gains that some Fed critics link to the central bank’s easy money strategy.
Even if Powell is right, rising inflation is likely to complicate the path to a US economic recovery if investors continue to have doubts.
“Powell is prepared to let inflation soar and he is unlikely to take action in the face of this, unless it gets out of hand,” ING economists James Knightley and Padhraic Garvey said in a note to customers. “The problem is that we won’t know if it’s in or out of control until we let it rip a little bit.”