Evelyn Reynolds

The Federal Reserve is expected to consider speeding up its tapering of bond purchases at its Dec. 14-15 meeting.
Several Fed officials have spoken publicly about accelerating the wind-down of the program, and minutes from the Fed’s November meeting revealed Wednesday that some Fed officials were in favor of a more rapid tapering.
Even if the Fed does not end its bond-buying early, economists expect central bank officials will ramp up hawkish rhetoric in order to fight inflation.

Federal Reserve Chairman Jerome Powell attends the House Financial Services Committee hearing on Capitol Hill in Washington, U.S., September 30, 2021.
Al Drago | Reuters

Expect more tough talk from the Federal Reserve, as it may consider winding down its bond program sooner than expected.
Based on comments from a number of Fed officials, market pros now expect the central bank to discuss at the Dec. 14-15 meeting whether they should move even faster to end their quantitative easing program.

“They’re going to accelerate tapering in December, and it now looks like growth could easily cross 6% and could approach 7% in the fourth quarter,” said Diane Swonk, chief economist at Grant Thornton. “The economy is strong and hot. It’s not a bad thing. It’s a boom. You can’t escape it. The Fed has to adjust.”
Even if it doesn’t decide to cut back on more bond purchases in December, the Fed’s tone should sound much more hawkish than it has previously in the post-pandemic era.

A tougher Fed

Fed officials announced after their early November meeting that they would begin to slow the bond purchases at a pace of $15 billion a month, effectively ending the program in the middle of 2022. Once that program is complete, the door is open for the Fed to begin lifting its fed funds target rate from zero.
Minutes from that meeting, released Wednesday, show that some Fed officials want a faster pace of tapering assets, and various members said the central bank may need to raise interest rates faster if inflation keeps rising. Stocks sold off after the 2 p.m. release.
“If they want to have any distance whatsoever between tapering and liftoff, they need to get it out of the way. It’s justified. We have a strong economy,” Swonk said.

San Francisco Fed President Mary Daly, considered a dove, was the latest official on Wednesday to say the central bank could speed up the end of its $120 billion monthly bond-buying program.
In the past week, expectations for a Fed rate hike have moved up dramatically, and Daly’s comment pushed them even higher.
Now, the futures market reflects a 66% chance of a quarter-point May rate hike and a 60% chance of a third rate hike by next December, according to Peter Boockvar, chief investment officer at Bleakley Advisory Group. Other rates have also been moving higher, especially the 2-year bond, which is closely linked to fed funds.
The 2-year was at 0.64% on Wednesday.
Fed governor Christopher Waller and Fed Vice Chairman Richard Clarida both mentioned accelerating the taper process last week. Waller said last Friday that the Fed should end its purchases by April, instead of June.
“Now it’s a real thing at the December meeting, whether the Fed will make a decision about speeding up tapering or they’ll say they talked about speeding up the taper,” said Boockvar. He said by December, the Fed will also have more data, showing more hot consumer inflation and a strong jobs market.

A balancing act

The latest report was core personal consumption expenditures inflation, which was up 4.1% year over year in October, the highest since 1991. Economists expect November’s employment report to show more than 500,000 payrolls were added, when it is released a week from Friday. Weekly jobless claims were at 199,000, the lowest since 1969.
But Vincent Reinhart, chief economist at Dreyfus and Mellon, does not expect the Fed to decide to taper faster.
“We’re at a phase where market participants are getting ahead of themselves. All Fed officials are doing is saying they want to have options available. I think they want to sound more hawkish in that context,” said Reinhart. “What happens if market participants think you are clueless about inflation and you are behind the curve … The paradox they’re in is by talking tough, they may not have to be as tough.”
He said it’s a balancing act for the Fed to sound like it is ready to fight inflation but not to sound so hawkish that the market moves too much.
“The fact that they’re taking $15 billion off a month is already fast by precedents,” he said. “But I don’t think they would do it unless they want to send an extremely strong signal. … To change asset purchases would be to send such an extremely strong signal, because it’s a blunt instrument. They probably don’t want to resort to that. They don’t get a lot out of it if you’re only talking about moving forward the date by a couple of months.”
President Joe Biden selected Fed Chairman Jerome Powell for a second term this week. His confirmation hearing is expected to be before Congress next month, and that should be an opportunity for him to sound more hawkish and emphasize that the Fed will do what it needs to curb inflation.
Boockvar said he expects the central bank will focus on the bond program before it needs to adjust its view on interest rates. In the past, markets became volatile as quantitative easing programs were ended. “I think the Fed’s going to focus on getting done with the taper first without creating any accidents. There’s no point for them to speculate on when they’re going to raise interest rates,” he said.

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Initial U.S. jobless claims
Weekly initial unemployment insurance claims, seasonally adjusted. Latest data: week ending Nov. 20.Source: U.S. Employment and Training AdministrationBy The New York TimesInitial unemployment claims tumbled last week to their lowest point since 1969, the Labor Department reported Wednesday.New filings for state benefits totaled 199,000 on a seasonally adjusted basis, a decline of 71,000 from the previous week.The drop marks a milestone in the economy’s recovery from the pandemic. Weekly claims peaked at more than six million in April 2020 as the coronavirus forced businesses and consumers alike to shut down. As recently as early January, amid a winter resurgence of the coronavirus, new state claims exceeded 900,000 in one week.Filing for unemployment benefits has come down sharply since then, but remained well above prepandemic levels until very recently.Unemployment insurance was a key source of relief after the pandemic threw more than 20 million people out of work. To buttress state payments, emergency benefits were funded through federal pandemic relief bills, although those payments ceased in September, cutting off aid to 7.5 million people.Despite a summer lull, the economy has been showing signs of life lately. Employers added 531,000 jobs in October, and most economists expect growth to pick up in the final quarter of the year, boosted by healthy consumer spending.“Today’s data reinforce the historic economic progress we are making and the importance of building on that progress in the weeks ahead,” President Biden said in a statement about the unemployment claims report.As one measure of progress, Mr. Biden pointed to the most recent tally of unemployment benefits of all sorts, from early November, which showed the number of people with continuing claims — those filing for benefits who have already filed an initial claim — at 2.4 million. The figure right before Thanksgiving last year was more than 20 million.The biggest economic worry lately hasn’t been joblessness but inflation, which has been surging amid labor shortages, supply chain disruptions and higher energy prices.In a separate report Wednesday, the Commerce Department said that household spending rose 1.3 percent in October, while personal income jumped 0.5 percent, before adjusting for inflation. It also showed that prices climbed by 5 percent in the 12 months through October.The data for unemployment claims, although certainly welcome news, may not be quite as good as it seems. On an unadjusted basis, state claims rose last week. And employment remains 4.2 million below its level in February 2020, before the pandemic.“While the labor market is recovering, we think the latest drop in claims may be overstated,” said Gregory Daco, chief U.S. economist at Oxford Economics. “We suspect the decline last week may have been exaggerated by quirky seasonal adjustment factors and think we might see a bounce-back in the weeks ahead.” More

Wheat prices are now at the highest level since 2012 and are up over 10% in just the past month, due to severe drought.
Wildfires in the West left honeybees with little to eat.
“We can’t run and hide anymore from global severe weather events because they’re all part of the food chain,” said Michael Swanson, agriculture economist at Wells Fargo.

The Pie Shop in Washington, D.C.

As Americans sit down at their Thanksgiving tables, many of the items in front of them will be more expensive than they were last year. Pies in particular. And climate change is a contributing factor.
Inflation is hitting every sector of the economy, and food products are not immune. But many of the ingredients that go into holiday pies have been hit by floods, fires and drought, causing shortages and pushing prices higher.

For example, the crust. Wheat prices are now at the highest level since 2012 and are up over 10% in just the past month. Severe drought in the U.S. west and northern plains caused what the U.S. Department of Agriculture is estimating will be the worst wheat production in nearly two decades.
Those higher costs for wheat, as well as alfalfa, make feed costs higher, causing dairy prices to rise. Cows also produce less milk during droughts.
Then there’s the pie filling.
“The Pacific Northwest had a terrible year between the heat and the drought. We saw a lot of things that they are good at, like cherries and apples, see a pretty major hit to their production from where they typically are,” said Michael Swanson, agriculture economist at Wells Fargo.
Pumpkins are also pricier, due to heavy rains in the midwest that caused a pumpkin shortage. The average price of a pumpkin was 15% higher this fall.

Even honey. Wildfires in the West left honeybees with little to eat. States like California, Colorado, Montana and Utah have lost nearly half their honeybee colonies in the past two years, due to disease, starvation and unusual weather.
Imports are also affected. Prices for vanilla from Madagascar and chocolate from Brazil are also rising due to severe weather and flooding.
“Now we worry about freezes in Brazil even more than we did before, or floods in China. And so we can’t run and hide anymore from global severe weather events because they’re all part of the food chain,” said Swanson.
At The Pie Shop in Washington, D.C., Thanksgiving orders are all filled and the pies are piling up, but so are the costs.
“I would say there are a number of ingredients that on some weeks are almost double what they were last year,” said Sandra Basanti, who has owned the Shop with her husband for 12 years.
Basanti tries to source ingredients locally to keep costs down, but large items like flour, sugar and eggs need to be bought from bulk distributors. She also makes savory pies that require beef, and the cost of that is rising as well.
All of it is hitting her small business especially hard.
“Usually Thanksgiving is when we’re able to make a little extra money to cushion us for the slow winter. However, this year, I’m not so sure that we will really even be profitable,” she said.
Over 12 years Basanti said she has raised her prices maybe 10%, but that is not enough to make up for the recent hike in her production costs. She doesn’t want to raise prices now, she said, because, “There’s only so much you can really charge for a pie.”

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Initial jobless claims totaled 199,000 last week, the lowest total since November 1969.
Second-quarter GDP growth was revised slightly higher to 2.1%, a bit below estimates.
Orders for long-lasting goods fell 0.5% for the month, below the expectation for a small gain.

The ranks of those submitting jobless claims tumbled to their lowest level in more than 52 years last week, the Labor Department reported Wednesday.
New filings totaled 199,000, a number not seen since Nov. 15, 1969, when claims totaled 197,000. The report easily beat Dow Jones estimates of 260,000 and was well below the previous week’s 270,000.

The Labor Department did not indicate any special factors that caused the stunning fall, which could provide an important signal about a jobs market that has been struggling to come back since the Covid-19 shock in March 2020.
The decline appeared at least in part to be due to seasonal adjustments. Unadjusted claims totaled 258,622, which actually was an increase of 7.6% from the previous week.
In other economic reports Wednesday morning, second-quarter GDP growth was revised up slightly to 2.1%, though that was below estimates for 2.2%. Also, durable goods orders declined 0.5%, worse than expectations of a 0.2% gain.
Along with the drop in weekly claims, continuing claims, which run a week behind, fell by 60,000 to 2.05 million, a fresh pandemic-era low and a strong sign that the labor market is getting notably tighter.

The total of those receiving benefits under all programs fell sharply, down by 752,390 to 2.43 million, according to data through Nov. 6.

The data comes amid surging inflation in the U.S. that is running at its fastest pace in 30 years. Clogged ports and supply chains have been major contributors to higher prices as manufacturers and service providers meet escalating demand.
The tumble in weekly claims could get the attention of policymakers at the Federal Reserve who have kept crisis-level policies in place despite the steady improvement in the jobs market.
While the Fed already has said it will begin gradually reducing its monthly bond purchases, markets are watching closely to see when the central bank might start raising interest rates. Though officials have indicated a possibility of perhaps one rate hike in 2022, traders are now indicating about a 61% probability of three increases next year, according to the CME’s FedWatch tracker.
Government bond yields were higher after the report, and Wall Street braced for a negative open in stocks.
The drop in claims came alongside indications that the economy grew a bit faster than originally thought over the summer, though not quite as quickly as Wall Street had expected.
GDP, a total of all goods and services produced, increased one-tenth of a percentage point from the initial estimate of 2%, mostly on the backs of upward revisions in consumer purchases and private inventory investment, according to the Commerce Department.
The report also saw a massive revision to the increase in wages and salaries, which rose $301.1 billion, an upward revision of more than 50% from the original estimate.
Finally, a separate report showed that orders for longer-lasting goods fell for the second consecutive month.
However, excluding transportation, durable goods orders increased 0.5%, and excluding defense, they were up 0.8%.
Nondefense new orders for capital goods, a proxy for business investment, fell 1.2% for the month. However, shipments, unfilled orders and inventories all rose.

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Prices for core personal consumption expenditures increased 4.1% from a year ago, the highest since January 1991.
Along with the surge in prices came an increase in the amount consumers spent, which rose 1.3% for the month.

Gasoline prices are displayed at a gas station on November 16, 2021 in San Mateo County, California.
Liu Guanguan | China News Service | Getty Images

Inflation rose strongly in October, accelerating at its fastest pace since the early 1990s, according to a Commerce Department gauge released Wednesday that is closely followed by Federal Reserve policymakers.
Prices for personal consumption expenditures excluding food and energy increased 4.1% from a year ago, with the so-called core reading last higher in January 1991. The Fed prefers that measure as it excludes the volatility that the two categories can show.

The reading matched the Dow Jones estimate.
Including food and energy, the PCE index rose 5%, the fastest gain since November 1990.
Along with the surge in prices came an increase in the amount consumers spent, which rose 1.3% for the month, higher than the 1% estimate. That came with a 0.5% increase in personal income, which was well ahead of the 0.2% estimate.
Inflation continued to be reflected most in surging energy costs, which rose 30.2% from a year ago, while food prices increased 4.8% during the span. Services inflation gained 6.3%, the same as in September, while goods inflation jumped 7.3%, up from the 6.4% pace in the previous month.
Personal savings totaled $1.32 trillion for the month, as the 7.3% rate as a share of disposable personal income declined from 8.2% in September, when savings totaled $1.48 trillion.

Fed policymakers have been wrestling with inflation that has been more aggressive and persistent than they had anticipated. Officials have said they believe inflation is at the point where they can start gradually reducing the amount of monthly stimulus they are providing through bond purchases, but markets are anticipating that interest rates may have to rise soon as well.
Traders are now pricing in three 25 basis point rate hikes in 2022, with the probability rising following the 10 am ET inflation report. Fed officials have said they see at most one hike next year, though that could change at the December Federal Open Market Committee meeting, when officials will release their latest forecast on rates, unemployment and GDP growth.
Inflation has hit consumer sentiment as well.
A confidence reading also released Thursday, from the University of Michigan, dropped to 63.5 for November, its worst in a decade and down from 67.9 in October.
“The decline was due to rapidly escalating inflation combined with the absence of federal policies that would effectively curb a surging inflation rate. While pandemic induced supply-line shortages were theprecipitating cause, the roots of inflation have grown and spread more broadly across the economy,” said Richard Curtin, the survey’s chief economist.

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Administration officials blame the Delta variant for a prolonged stretch of consumer spending on goods, rather than services, pushing up prices and creating a conundrum for the Fed.WASHINGTON — President Biden’s top economists have worried from the beginning of his administration that rising inflation could hamstring the economy’s recovery from recession, along with his presidency. Last spring, Mr. Biden’s advisers made a forecasting error that helped turn their fears into reality, a calculation that spread to this week’s decision to renominate the Federal Reserve chair.Administration officials overestimated how quickly Americans would start spending money in restaurants and theme parks, and they underestimated how many people wanted to order new cars and couches.Mr. Biden’s advisers, along with economists and some scientists, believed that widespread availability of coronavirus vaccinations would speed the return to prepandemic life, one in which people dined out and filled hotel rooms for conferences, weddings and other in-person events.Instead, the emergence of the Delta variant of the virus over the summer and fall slowed that return to normalcy. Americans stayed at home, where they continued to buy goods online, straining global supply chains and sending the price of almost everything in the economy skyward.“Because of the strength of our economic recovery, American families have been able to buy more products,” Mr. Biden said this month at the Port of Baltimore. “And — but guess what? They’re not going out to dinner and lunch and going to the local bars because of Covid. So what are they doing? They’re staying home, they’re ordering online, and they’re buying product.”That view is the closest thing the administration has offered to an explanation for why the White House was surprised by the size and durability of a price surge that has hurt Mr. Biden’s poll numbers and imperiled part of his economic agenda in Congress. From the administration’s perspective, the problem is not that there is too much money sloshing around, as Republicans and some economists insist, but that consumers are throwing an unexpectedly large amount of that money at a narrow set of things to buy.Put another way: If Mr. Biden had sent people travel vouchers or DoorDash gift cards for services — instead of sending Americans direct payments as part of his $1.9 trillion rescue plan in March — the inflation picture might look different right now..css-1xzcza9{list-style-type:disc;padding-inline-start:1em;}.css-3btd0c{font-family:nyt-franklin,helvetica,arial,sans-serif;font-size:1rem;line-height:1.375rem;color:#333;margin-bottom:0.78125rem;}@media (min-width:740px){.css-3btd0c{font-size:1.0625rem;line-height:1.5rem;margin-bottom:0.9375rem;}}.css-3btd0c strong{font-weight:600;}.css-3btd0c em{font-style:italic;}.css-1kpebx{margin:0 auto;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-family:nyt-cheltenham,georgia,’times new roman’,times,serif;font-weight:700;font-size:1.375rem;line-height:1.625rem;}@media (min-width:740px){#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-size:1.6875rem;line-height:1.875rem;}}@media (min-width:740px){.css-1kpebx{font-size:1.25rem;line-height:1.4375rem;}}.css-1gtxqqv{margin-bottom:0;}.css-19zsuqr{display:block;margin-bottom:0.9375rem;}.css-12vbvwq{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;}@media (min-width:740px){.css-12vbvwq{padding:20px;width:100%;}}.css-12vbvwq:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-12vbvwq{border:none;padding:10px 0 0;border-top:2px solid #121212;}.css-12vbvwq[data-truncated] .css-rdoyk0{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-12vbvwq[data-truncated] .css-eb027h{max-height:300px;overflow:hidden;-webkit-transition:none;transition:none;}.css-12vbvwq[data-truncated] .css-5gimkt:after{content:’See more’;}.css-12vbvwq[data-truncated] .css-6mllg9{opacity:1;}.css-qjk116{margin:0 auto;overflow:hidden;}.css-qjk116 strong{font-weight:700;}.css-qjk116 em{font-style:italic;}.css-qjk116 a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;text-underline-offset:1px;-webkit-text-decoration-thickness:1px;text-decoration-thickness:1px;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:visited{color:#326891;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:hover{-webkit-text-decoration:none;text-decoration:none;}Inflation has risen across wealthy nations over the past year, but it has risen faster in the United States, where prices rose 6.2 percent in October from the year before. America’s inflation has been exacerbated, in part, by Mr. Biden and his predecessor, Donald J. Trump, pouring more fiscal support into the U.S. economy than their counterparts did elsewhere, at a time when consumption patterns shifted and did not rapidly snap back to normal.Republicans, and even some left-leaning economists such as the former Obama administration officials Lawrence H. Summers and Jason Furman, have blamed the rapid price increases across the economy on the aid package that Mr. Biden signed in the spring. They say the package’s direct assistance to Americans, including $1,400 checks to individuals and enhanced benefits for the unemployed, fueled more consumer demand than the economy could bear, driving prices skyward.Mr. Biden is betting that those critiques are largely wrong — and that the Fed would be wrong to follow their advice. His aides say excess consumer demand is not the driver of the fastest price increases America has seen in decades, and that the economy needs more fuel, not less, to complete the job of delivering wage and employment gains to historically marginalized workers.The president wants Fed Chairman Jerome H. Powell, whom he reappointed this week for a second term, to join him in that wager — by avoiding quick increases in interest rates that could choke off growth, and which would not address what White House officials see as the real cause of inflation: the virus.“We’re still dealing with the difficult challenges and complications caused by Covid-19 that are driving up costs for American families,” Mr. Biden said on Monday at the White House, in announcing Mr. Powell’s reappointment and laying the blame for inflation at the feet of the resurgent virus.A cafe that closed this summer in Washington. The resilience of the coronavirus slowed Americans’ return to spending on in-person services like dining and tourism.Alyssa Schukar for The New York TimesWhile prices are up broadly across industries and sectors of the economy, there is a wide gulf in the inflation rates of physical things people buy and the services they consume. The Consumer Price Index for services is up 3.6 percent from the previous year. For durable goods, it is up 13.2 percent. And those goods represent a much larger share of America’s consumer spending than they did before Covid-19 hit.On the eve of the pandemic, about 31 percent of American consumer spending went toward goods, and the rest toward services. In September, that share had risen to about 35 percent, down just slightly from its pandemic highs. Those few percentage points made a huge difference for supply chains, which were suddenly carrying record-shattering levels of toys, electronics and other goods from country to country, and straining under the load.The $1.9 trillion rescue plan “juiced demand, and importantly for the inflation story, much of that demand played out in reduced consumption of in-person services and increased demand for manufactured goods,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in a speech this week.“That, in tandem with the impact of the virus on transportation logistics, has played a role in elevated price growth.”Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More

An unusual surge in home buying, just as the market enters the historically slow holiday season, is driving mortgage demand higher.
Mortgage demand from home buyers rose for the third straight week.
Mortgage applications to refinance a home loan were essentially flat, rising just 0.4% from the previous week.

A real estate sign advertising a home “Under Contract” is pictured in Vienna, Virginia, outside of Washington.
Larry Downing | Reuters

An unusual surge in home buying, just as the market enters the historically slow holiday season, is driving mortgage demand higher. Total mortgage application volume rose 1.8% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.
The increase was largely driven by applications to purchase a home, which rose 5% for the week but were still 4% lower than the same week one year ago. That was the third-straight weekly gain.

Buyers may be rushing in during the usually slow holiday season because they are concerned that mortgage rates will move even higher than they have in the past month. Given how expensive homes are today, some buyers could be priced out if rates move much higher. 
“Both conventional and government loan applications increased, and the average loan size for a purchase loan was at $407,200, continuing its ongoing 2021 run of being mostly above $400,000,” said Joel Kan, an MBA economist, in a release. 
Mortgage rates have been climbing higher for the past month and continued to do so last week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.24% from 3.20%, with points decreasing to 0.36 from 0.43 (including the origination fee) for loans with a 20% down payment. 
Mortgage applications to refinance a home loan were essentially flat, rising just 0.4% from the previous week. They were 34% lower than the same week one year ago when rates were 32 basis points lower. 
“The financial markets continue to discern the Federal Reserve’s policy path in the coming months in light of the current high growth, high inflation environment. Despite a fair amount of rate volatility last week, mortgage rates were higher,” said Kan, MBA’s associate vice president of economic and industry forecasting. “Borrowers continue to lock in mortgages in anticipation of higher rates in the future.”

The refinance share of mortgage activity increased to 63.1% of total applications from 62.9% the previous week. 
Mortgage rates continued to move higher this week and are now more than 10 basis points higher than they were last Friday, according to Mortgage News Daily. Rates are now at the highest level since last April.

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The surge in inflation that has driven prices higher for a broad range of goods is unique to the pandemic but has a lot in common with the price pressures following World War II.
The extent of inflationary pressures post-pandemic have taken many by surprise in part because of the way the pandemic affected consumer behavior.
“You had a very quick and abrupt shift in the economy,” said Michael Gapen, chief U.S. economist at Barclays. “And it takes time to retool. It’s a super tanker. It takes time to turn.”

Residential single family homes construction by KB Home are shown under construction in the community of Valley Center, California, U.S. June 3, 2021.
Mike Blake | Reuters

Not since Americans came home from World War II has inflation percolated through the U.S. economy like it is now, and it could continue to do so for months to come.
That’s because the pandemic hit the economy like a sledge hammer, shattering the normal way business is conducted and consumers live their lives. The disruptions for many businesses have been difficult to repair, and the return to normal has been challenging due to supply chain disruptions and labor shortages.

“You had a very quick and abrupt shift in the economy,” said Michael Gapen, chief U.S. economist at Barclays. “And it takes time to retool. It’s a super tanker. It takes time to turn.”
Companies and consumers across the country are feeling the hit from rising prices and goods shortages, and many businesses are adjusting the way they operate.
Frank Barbera, president of Barbera Homes in the Albany, N.Y. area, said this period of rising prices is unique in the 30-year history of his family business.
“The costs definitely went up faster than the price. Our average home is up over $60,000 and that’s just hard costs passed along. The average two-by-four for example over the course of the past year from July, 2020 to roughly the same period in 2021, went from $4.30 to $11.36,” he said. The two-by-four is now about 50% lower but lumber is still volatile.
Barbera said other building materials have also gone higher, including a 20% increase in insulation this year.

Homebuilder Chris Carr said his construction company has changed the way it buys some materials for the homes he builds in New Jersey beach towns, like Avalon and Stone Harbor. 
“We’ve acquired more storage space so we can store all the things we are buying. We’re buying truckloads of roofing materials” plumbing supplies and other materials, said Carr, owner of McLaughlin Construction.
“Before we were just-in-time purchasers, and so for certain aspects of a home we can’t do that anymore.”
Pressures on prices
Pent up demand, changing lifestyles and a load of stimulus money created a surge in demand for all kinds of goods. But that demand has met a supply network that was also damaged by the pandemic and is struggling to return to a more normal level of activity. Labor shortages and logistics problems are compounding the situation.
Gapen said the consumption of core goods is now about 17% to 20% above pre-pandemic levels and core services demand has not yet recovered. Core goods exclude food and energy.
“It’s like any economy in any situation would be in trouble if its citizens were requiring it to produce 20% more goods in one year’s time,” he said. Post-pandemic consumers changed their lifestyles. Many fled to suburbs and beyond, moved into houses, and furnished home offices. They also needed cars.
“It’s the greatest historical anomaly in the relationship between core goods and services prices that we’ve seen since the end of World War II,” said Gapen. “I think the World War II experience is the closest parallel to what we’re seeing.”
Soldiers returned home in the late 1940s, and the demand for everything from housing to clothing soared. “You had to rejigger the economy and re-employ all those people. What happened is you had an inflation boost for two or three years,” Gapen said. “By the end of the ’40s, you were flirting with deflation.”
The debate among economists is how much of this pandemic era inflation will linger and how much of it will be temporary. In October, the consumer price index was up 6.2% year-over-year, the highest in 31 years. Core CPI, excluding food and energy, was up 4.6%.

Goods prices across the board have been rising. The price of gasoline in October was up about 50% over last year. Used cars were up 26%, and new cars were up nearly 10% year-over-year.
The index for meats, poultry, fish and eggs jumped 11.9% while beef prices were up 20% from a year ago in October.
“It’s a relative demand story. Three [core] goods categories are responsible for most of that inflation – autos, used autos and household furnishings. Bigger durable items,” he said.
For decades, core goods prices have fallen relative to services. “It’s just really unusual to see this surge in goods prices and trend because of things like technology innovations and globalization had meant that you may pay more for that computer, but the computer you have today is far more powerful than the one you had 20 years ago,” Gapen said.
Apparel and appliances are two areas where globalization has resulted in lower price trends. According to Moody’s Analytics, relative to the overall consumer price index, the price of appliances is down 46% since the year 2000, meaning appliance prices are higher but they are 46% lower than consumer prices. Apparel prices are also higher but they are 43% lower than consumer prices in that period.

Arrows pointing outwards

An area where prices have risen very rapidly was hospital services, where prices are 92% higher than overall consumer prices since 2000.
Gapen notes that normally consumers tend to halt purchases of durables in more traditional downturns, leading to price declines of core goods. But as the economy recovers from its downturn, household demand for durables tends to increase, bringing prices back up.
But the pandemic was unusual and instead it boosted goods prices relative to services, raising concerns about how long prices will rise.

Mark Zandi, chief economist at Moody’s Analytics, does expect to see a decline in prices in some categories next year.
Meanwhile, the inflation could feed on itself as consumers and businesses acquire hard-to-get items, making prices go even higher. But that cycle should break once producers catch up, inventories build and overproduction could cause prices to drop.
He therefore expects inflation to ultimately fall back to about 2.5% for core CPI, excluding food and energy.
“It may take until early 2023, but I think we’ll settle into 2.5% core CPI. I actually think there’s a possibility that prices are actually lower again. I think energy prices will come in, vehicle prices will come in and various building materials will come in,” he said.
But still, there is a risk they won’t.
“If these spikes in prices do affect inflation expectations and get embedded in wage price dynamics then we have a problem,” Zandi said. “I don’t think we’re there. I think this is garden variety supply shocks which result in big price spikes but that sows the seeds of future declines.”
“At that point you have prices coming back down to earth, and that’s the dynamic I think we’re going to see,” he said.
Paying the rent
Shelter costs are an area where many renters would expect to see a sharp increase, but they rose just 3.5% year over year in October in the CPI. The category includes rents and owners equivalent rent, and makes up about a third of CPI.
Rent is one area where economists expect to see continued price increases, even as other categories fall. According to Apartment List, rents between the beginning of the year and October were up 16% nationally, and CPI data should start to catch up.
“That’s being affected by the pandemic but regardless of whether there’s a pandemic or not, rent prices would have accelerated because of an affordable housing shortage,” said Zandi. “The pandemic made it worse because you have all these millennials that went back to live with their parents or doubled up when the pandemic hit. They’re all starting out on their own, forming households and renting.”
Zandi said rent is adding a half percentage point to his 2.5% CPI forecast, and that is the factor that could keep inflation above the Fed’s 2% target.
Builders, like Barbera, are still seeing strong demand for single family houses even with much higher prices. In order to meet demand, Barbera is carefully managing what he builds.
“We limited our lot releases so in some neighborhoods we stopped selling temporarily or we limited the amount of lots we put on the market at one time so that we could have better control over not only costs but labor, making sure we could produce what we’re selling,” he said. “We have been fortunate. We have a very stable trade base, but everyone is working 24/7 just to keep up.”
He’s hoping prices will start to stabilize.
“Other than lumber, I cannot foresee any of the products we’re currently using coming down in price, and I don’t see labor coming down. It will find its peak, but materials have not leveled off yet,” Barbera said.
But for small businesses, the challenge is to operate effectively.
“With the price increases we’ve seen, we had a lot of homeowners who have said ‘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. “Other than lumber, every other material we’re seeing is going up in price. On a weekly basis, we’re getting price increase notices. It’s a very volatile market.”
Carr emphasizes that the volatility, except with lumber, has been one way. “I’m not getting 2% to 3% price notices from these suppliers. I’m getting 10% to 15% increases multiple times a year,” he said. Carr said depending on the home, the cost is 25% to 50% higher in the past two years. “Land values have increased. The whole package has increased.”

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