America is now two years into abnormally high inflation — and while the nation appears to be past the worst phase of price increases, the road back to normal is a long and uncertain one. Higher prices for services are now driving inflation:
Shoppers check out at a Wegman’s grocery store in Brooklyn on March 14, 2023.
What generated the painful inflation, and what comes next? A look through the data reveals a situation that arose from pandemic disruptions and the government’s response, was worsened by the war in Ukraine and is now cooling as supply problems clear up and the economy slows. But it also illustrates that U.S.
Demand for goods was unusually high: Families had more money than usual after months at home and repeated stimulus checks, and they were spending it on cars, couches and deck furniture. At the same time, the pandemic had shut down many factories, limiting how much supply the world’s companies could churn out. Shipping costs surged, goods shortages mounted, and the prices of physical purchases from appliances to cars jumped.
Across the economy, firms seized the moment to pad their bottom lines; profit margins soared in late 2021 before moderating late last year. Even if pay gains had not been the original cause of inflation, policymakers were concerned that it would be difficult for price increases to return to a normal pace with pay rates rising briskly. Companies, they thought, would keep raising prices to pass on those labor expenses.
In the months since, inflation has slowed as cost increases for energy and goods have cooled. But food prices are still climbing swiftly, and — crucially — cost increases in services remain rapid.They could soon start to fade in one key area. Housing costs have been picking up quickly for months, but rent increases have recently slowed in real-time private sector data. That is expected to feed into official inflation numbers by later this year.
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