You need more bacon for bacon these days.
A year ago, consumers in Midwestern cities spent an average of $6.01 on a pound of sliced bacon. Today, it’s up by more than a dollar, to $7.40.
But bacon isn’t the only thing consumers buy that’s seen a price increase: in recent months, the cost of groceries, clothing, housing, gas and cars, among other goods, has been increasing, according to data from the Bureau of Labor Statistics.
The trend marks a continuation of a period of higher-than-normal inflation. In May, the BLS measured a 5% gain relative to the previous May in the Consumer Price Index, or CPI, a number designed to measure the costs of goods consumers buy. The gain was more than double the usual growth of the CPI in the span of a year — around 2% — and marked the largest one-year jump in the CPI since a short period of higher inflation in August 2008.
Economists said the price gains were related to the pandemic and predicted that prices work themselves out after the economy normalized. But recent numbers indicate the trend hasn’t stopped yet, with higher-than-usual increases in the CPI announced each month since.
Shocks to the system
Think of the pandemic as a dramatic shock to the economy, said Tyler Schipper, an assistant professor of economics at the University of St. Thomas.
“The economy is Humpty Dumpty and he fell off the wall and broke into tons of pieces,” Schipper said. “That prices continue to go up just means that it takes a long time to put those things back together.”
Take the oil and natural gas industries, for example. About a year ago, prices were very low, Schipper said. That meant it didn’t always make sense for facilities to be producing oil and natural gas at high volumes. Once demand rises, it takes time to bring facilities back online.
Then, particularly in the case of oil, “they’re also running into supply chain bottlenecks, whether that’s increased cost for transportation within the U.S., or in some cases getting in through ports. And those bottlenecks are both slowing things down and pushing up prices,” Schipper said.
The market for cars is another example of things not being quite back to normal, something Schipper said he’s experienced first-hand recently.
“I finally bought a new car, (but) I don’t have a new car right now, I have a new car in January or February maybe,” he said.
The car economy has been backed up for a couple reasons: new cars need computer chips, and computer chip factories aren’t meeting demand because of COVID-19 shutdowns, huge demand for consumer electronics during the pandemic and because of weather. Meanwhile, used cars’ prices have been pushed up because of high demand, and because rental car companies, which normally offload a lot of cars onto the secondhand market, didn’t do that to the degree they normally do during the pandemic, constricting the supply.
In recent months, the price increases for used cars started to slow down, but the increases remain for new cars.
So costs, at least according to the CPI, keep rising — but will it go on forever?
Mark Wright, senior vice president and director of research at the Federal Reserve Bank of Minneapolis, said many of the clearly pandemic-related cost increases — like the increase in car prices — are still likely to work themselves out.
“I think that we’re going to see the same kinds of inflation stories into next year. Some of that is just that the supply chain bottlenecks aren’t going to be resolved immediately,” he said.
Other cost increases, like those seen in housing, are a reflection of a hot real estate market that’s now showing signs of a slight cool-down.
When the Federal Reserve measures inflation, it tends not to focus on the CPI. Instead, the Fed’s preferred measure is the Personal Consumption Expenditure, or PCE, which has shown smaller increases. Another measure, the trimmed mean PCE, estimated by the Federal Reserve Bank of Dallas, has shown smaller gains, too, which Wright said supports the idea that this period of price increases may be temporary.
If officials at the Federal Reserve decide inflation is too high, they can take action to slow it down.
At the Fed’s September Federal Open Market Committee meeting, Federal Reserve officials indicated they may soon support tapering off the purchase of government bonds designed to stimulate the economy during the pandemic, the New York Times reported.
Chair Jerome Powell said supply bottlenecks could continue but that he expects inflation to return to around 2% in the long-run.
“While these supply effects are prominent for now, they will abate. And as they do, inflation is expected to drop back toward our longer-run goal,” he said.