KB Home’s construction of single-family homes is shown under construction in the Valley Center community, California, the United States, June 3, 2021.
Mike Blake | Reuters
Since Americans returned from World War II, inflation has not penetrated the US economy as it is now, and it could continue to do so for the months ahead.
That’s because the pandemic hit the economy like a sledgehammer, destroying the normal way of doing business and the lives of consumers. The disruptions have been difficult to resolve for many businesses and getting back to normal has been challenging due to supply chain disruptions and labor shortages.
“You have had a very rapid and abrupt change in the economy,” said Michael Gapen, Barclays’ chief US economist. “And it takes time to retool. It’s a supertanker. It takes time to turn around.”
Businesses and consumers across the country are facing rising prices and shortages of goods, and many companies are adapting the way they work.
Frank Barbera, president of Barbera Homes in the Albany, NY area, said this period of rising prices was unique in the 30-year history of his family business.
“The costs have definitely increased faster than the price. Our average home is up over $ 60,000 and that is just a hard cost passed down from $ 4.30 to $ 11.36 in 2021, “he said. The two-by-four value is now about 50% lower, but wood is still volatile.
Barbera said other building materials have also increased, including a 20 percent increase in insulation this year.
Home builder Chris Carr said his construction company changed the way they buy some materials for the homes he builds in New Jersey beach towns like Avalon and Stone Harbor.
“We bought more storage space so we can store all of the things we buy. We are buying truckloads of roofing materials,” said plumbing and other materials, said Carr, owner of McLaughlin Construction.
“Before we were just-in-time buyers, we couldn’t do that for certain aspects of a home.”
Pent-up demand, changed lifestyles and lots of economic stimulus money increased the demand for goods of all kinds. However, that demand has hit a utility network that has also been damaged by the pandemic and is struggling to return to more normal levels of activity. Labor shortages and logistics problems exacerbate the situation.
Gapen said consumption of core goods is now around 17-20% above pre-pandemic levels and demand for core services has not yet recovered. Core goods exclude food and energy.
“It’s like every economy is in trouble in any situation if its citizens asked it to produce 20% more goods in a year,” he said. Post-pandemic consumers have changed their lifestyle. Many fled to the suburbs and beyond, moved into houses and set up home offices. They also needed cars.
“It is the largest historical anomaly in the relationship between the prices of core goods and services that we have seen since the end of World War II,” said Gapen. “I think the experience of World War II is the closest parallel to what we see.”
Soldiers returned home in the late 1940s and the demand for everything from apartments to clothing soared. “You had to reorganize the economy and recruit all of these people. What happened is you had an inflation spurt for two or three years,” Gapen said. “In the late 1940s you flirted with deflation.”
The debate among economists is how much of this inflation will persist in the pandemic era, and how much of it will be temporary. In October, the consumer price index rose 6.2% year-on-year, its highest level in 31 years. The core CPI excluding food and energy rose 4.6%.
The prices of goods have risen across the board. The price of gasoline rose by around 50% in October compared to the previous year. Used cars grew 26% and new cars grew nearly 10% year-over-year.
The index for meat, poultry, fish and eggs rose 11.9%, while beef prices rose 20% year over year in October.
“It’s a story of relative demand. Three [core] Most of this inflation is accounted for by categories of goods – automobiles, used cars, and home appliances. Larger durable items, “he said.
For decades, the prices of core goods compared to services have fallen. “It’s really unusual that this surge in commodity prices and trends due to things like technological innovation and globalization has made you pay more for this computer, but the computer you have today is much more powerful than the one you have They had before 20 years ago, “said Gapen.
Apparel and home appliances are two areas where globalization has resulted in lower price trends. According to Moody’s Analytics, device prices have decreased 46% compared to the overall consumer price index since 2000, which means device prices are higher but 46% lower than consumer prices. Clothing prices are also higher, but 43% lower than consumer prices during this period.
One area where prices have increased very rapidly has been in hospital services, where prices have been 92% above total consumer prices since 2000.
Gapen notes that consumers typically tend to stop buying durable goods during more traditional downturns, leading to declines in the price of key goods. However, when the economy recovers from its downturn, household demand for durable goods tends to increase, which drives prices up again.
But the pandemic was unusual, instead driving goods prices higher than services, raising concerns about how long prices will rise.
Mark Zandi, chief economist at Moody’s Analytics, expects prices to decline in some categories over the next year.
In the meantime, inflation could feed itself as consumers and businesses purchase hard-to-find items and prices continue to rise. However, this cycle should be interrupted as soon as producers catch up, inventories build up and overproduction could lead to a fall in prices.
He therefore expects core CPI ex food and energy inflation to eventually decline to around 2.5%.
“It may take until early 2023, but I think we’ll level off at 2.5% of the core CPI. I actually think that the prices are actually lower again. I think energy prices will go up, vehicle prices will go up, and different buildings. “Materials are coming,” he said.
But even so, there is a risk that they will not.
“If these price spikes influence inflation expectations and are embedded in wage price dynamics, then we have a problem,” said Zandi. “I don’t think we’re there. I think these are garden variety supply shocks that lead to large price spikes, but that sows the seeds for future declines.”
“At that point prices come back to earth and I think that’s the dynamic that we’re about to see,” he said.
Payment of rent
The cost of accommodation is an area many renters would expect to see a sharp increase, but year-on-year it was only 3.5% higher in October CPI. The category includes rents and owner-equivalent rents and accounts for around a third of the CPI.
Rents are an area where economists expect prices to continue to rise even if other categories fall. Rents rose 16% nationwide between the start of the year and October, according to Apartment List, and CPI data should start catching up.
“That is affected by the pandemic, but regardless of whether there is a pandemic or not, rental prices have accelerated due to a shortage of affordable housing,” said Zandi. “The pandemic made it worse because all of these millennials went back to their parents or doubled in size when the pandemic broke out. They all start on their own, set up households and rent out. “
Zandi said the rent increases his 2.5% CPI forecast by half a percentage point, and that’s the factor that could keep inflation above the Fed’s 2% target.
Builders like Barbera still see strong demand for single-family homes even with significantly higher prices. To meet demand, Barbera carefully manages what it builds.
“We have limited our lot releases so that we have temporarily stopped sales in some areas or limited the number of lots that we bring to market at the same time so that we can better control and ensure not only the costs but also the workload, that we can produce what we produce ‘sell’, he said. “We were lucky. We have a very stable trading base, but everyone works around the clock to keep up. “
He hopes prices will stabilize.
“With the exception of lumber, I cannot foresee that the prices of the products we are currently using will fall, nor do I see any decline in labor. It’s going to peak, but the materials haven’t leveled off yet, “said Barbera.
But the challenge for small businesses is how to work effectively.
“With the price hikes we’ve seen, we’ve had a lot of homeowners saying, ‘Holy smoke, this is expensive!’ Then it’s our job to make them understand what the trigger points were that made it expensive, “said Carr. “With the exception of wood, the price of every other material we see goes up. We receive price increases every week. It’s a very volatile market. “
Carr points out that, except for lumber, volatility has been one direction. “I do not receive price notifications of 2 to 3% from these suppliers. I get price increases of 10 to 15% several times a year, ”he said. Carr said the cost has been 25 to 50 percent higher over the past two years, depending on the home. “The property values have increased. The overall package has grown.”