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    There Is Shadow Inflation Taking Place All Around Us

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    Some companies haven’t been raising prices. Instead, they’ve been cutting back customer services and conveniences, but how should that be measured?Inflation has surged in 2021, with various official measurements of consumer prices rising faster than they have in years. But in a crucial respect, the data may be understating things.Many types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices (or not by only raising prices), but by taking steps that could give their customers a lesser experience.A hotel room might cost the same as a year ago — but no longer include daily cleaning services because of a shortage of housekeepers. Some restaurants are offering limited service, with waiters stretched thin. Would-be car buyers are being advised to be flexible on the color and even make and model, lest they face a long wait to get their new wheels.Customer sentiment on restaurant cleanliness fell 4.2 percent this year, according to Black Box Intelligence, which tracks online reviews of 60,000 restaurants. Complaints have been frequent about the cleanliness of tables, floors and bathrooms. Satisfaction with customer service was also down, especially regarding beverages, with guests complaining more about receiving the wrong order or no drink at all.People trying to buy appliances and other retail goods are waiting longer. According to J.D. Power, even at the highest-rated retailers, only 57 percent of customers were able to get customer service within five minutes this year, down from 68 percent in 2018.Government statistics agencies try to take changes in product quality into account when calculating inflation. But that process, known as hedonic adjustment, most commonly applies to physical objects. It is relatively straightforward to estimate the value of, say, the quality of stitching on a shirt or the value of a backup camera on a new car. There is a whole world of inflation alarmists who argue that this process leads to the understating of true inflation.But quality changes involving customer service can be ambiguous and hard to measure. The Bureau of Labor Statistics, which generates the Consumer Price Index, does not incorporate quality adjustment on 237 out of 273 components that go into the index, including the vast majority of services.Alan Cole, a former staffer for Congress’s Joint Economic Committee who writes the newsletter Full Stack Economics, noticed these sorts of annoyances during a long drive through the Northeast this summer — fast food that took an awfully long time to come, poorly stocked condiment stations, soda machines that were out of stock. The dynamic became even more clear to him when he stayed in a hotel that had a large area designated for offering hot breakfast to guests — it was mostly empty, with a few sad mini-boxes of cereal.For years, he had argued that official inflation measures actually overstated inflation, because there were many below-the-radar product improvements not captured by the data, like software that was becoming less buggy. Now, he concluded, the reverse seemed to be happening.When there are shortages of labor or supplies, some businesses adjust mostly or entirely by raising their prices. Others find less obvious, less easily measurable ways to adapt. Consider, for example, rental cars versus hotels. Both were dealing with shortages. But they showed up in different ways.“The car company just had to charge higher prices, while the hotel could take the hit through service quality instead,” Mr. Cole said in an email exchange. “We measure them in different ways. The car company’s problem gets measured as inflation, while the hotel’s problem is mostly relayed by anecdote.”It is not unusual for businesses to deal with supply shortages through mechanisms other than price increases. Retailers don’t want to attract accusations of price gouging when goods are in short supply, especially in times of natural disaster. So they end up with empty shelves, a back-door form of rationing. In the 1970s, gasoline prices skyrocketed — but not enough to prevent long lines and rules around which cars could fill up on which days.This particular economic crisis has had far-reaching consequences that have made economic data harder to interpret than usual. “Usually when there is a disaster, if you’re a macroeconomist it’s a blip on the radar screen,” said Carol Corrado, a distinguished principal research fellow at the Conference Board who has researched inflation measurements. “But we’re talking a different kettle of fish with the Covid shock, and the economic implications and costs have become much more challenging to measure than in the past.”It would be difficult for government statistics agencies to try to measure these hidden costs and factor them into inflation measures, say people who study the data closely.Customer service preferences — particularly how much good service is worth — varies highly among individuals and is hard to quantify. How much extra would you pay for a fast-food hamburger from a restaurant that cleans its restroom more frequently than the place across the street?“What gets up to the level of a quality adjustment does become pretty subjective,” said Alan Detmeister, a senior economist at UBS who formerly tracked inflation data for the Federal Reserve. “If the Labor Department even decided they wanted to quality-adjust some of these things, they would have an extremely hard time doing it.”In some cases, one person’s quality enhancement is another’s deterioration. Is online check-in at a hotel a desirable timesaving feature, or a loss of personal touch that has real value? Reasonable people can disagree.Moreover, while there appears to be some shadow inflation in service industries, the reverse has arguably held true for many years.Suppose you believe that restaurant food has become more varied and delicious over the last few decades, as chefs have become more skilled and creative. If so, maybe the 2.7 percent average annual inflation in full-service restaurant prices from 2000 to 2019 that the Bureau of Labor reported was too high.It’s plausible to believe that’s true, and also that the 4.9 percent rise in those prices over the 12 months ended in August was too low if the effects of labor shortages had been fully accounted for.This hints at why inflation bothers people so much — and why it’s a political minefield for the Biden administration. It’s not just the prices you see and the numbers that are fed into economic models, or the news headlines and central bank inflation targets.It’s also that a given amount of spending buys experiences that are a little less satisfying, and that this adds up to an accumulation of frustrations that don’t necessarily show in the numbers. More

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    Wholesale Used Car Prices Rise, Pointing to Higher Inflation

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    One of the most closely watched leading indicators of inflation on Wall Street has hit a record high, a sign that upward pressure on prices could last for months to come.The prices that dealers pay for used cars in the wholesale market jumped 5.3 percent from August to September, according to the Manheim Used Vehicle Value Index. It’s up 27.1 percent from last year.Used car prices have soared since the pandemic hit, when production snarls at automakers cut the supply of new vehicles as many Americans left urban centers for the suburbs, pushing up demand for personal vehicles.While used car prices are normally a tiny contributor to the overall movement of the Consumer Price Index, one broad measure of inflation, they have become a key influence on the direction of prices.Analysts hoping to get a good read on where inflation is heading have taken note of the Manheim index’s predictive power. As a wholesale price index, it offers a preview of the price changes that consumers will see roughly two months later, after dealers pass on their costs to buyers at the lot.The movement of the Manheim index this summer suggested that consumer prices for used cars were set to cool off, which might mean overall price increases would moderate. But the latest reading suggested that the demand and prices for used cars had reinvigorated as production issues for computer chips continued to hamper new car production. Recent storms, which resulted in potentially hundreds of thousands of flooded cars, have also contributed to demand.“The new-vehicle production problem worsened instead of getting better in Q3,” wrote Jonathan Smoke, the chief economist for Cox Automotive, the company that produces the index. “Used inventory issues were further exacerbated by damage to vehicles caused by Hurricane Ida in late August, putting pressure on an already historically tight market.” More

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    Oil and Gas Prices May Stay High as Investors Chase Clean Energy

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    Even as more costly fuel poses political risks for President Biden, oil companies and OPEC are not eager to produce more because they worry prices will drop.HOUSTON — Americans are spending a dollar more for a gallon of gasoline than they were a year ago. Natural gas prices have shot up more than 150 percent over the same time, threatening to raise prices of food, chemicals, plastic goods and heat this winter.The energy system is suddenly in crisis around the world as the cost of oil, natural gas and coal has climbed rapidly in recent months. In China, Britain and elsewhere, fuel shortages and panic buying have led to blackouts and long lines at filling stations.The situation in the United States is not quite as dire, but oil and gasoline prices are high enough that President Biden has been calling on foreign producers to crank up supply. He is doing so as he simultaneously pushes Congress to address climate change by moving the country away from fossil fuels toward renewable energy and electric cars.U.S. energy executives and the Wall Street bankers and investors who finance them are not doing anything to bolster production to levels that could bring down prices. The main U.S. oil price jumped nearly 3 percent on Monday, to about $78 a barrel, a seven-year high, after OPEC and its allies on Monday declined to significantly increase supply.Producers are still chafing at memories of the price crash early in the pandemic. Wall Street is even less enthusiastic. Not only have banks and investors lost money in the boom-bust cycles that whipsawed the sector over the past decade, but many also say they are prepared to pare their exposure to fossil fuels to meet the commitments they have made to fight climate change.“Everyone is very wary since it was just 15 or 16 months ago we had negative-$30-a-barrel oil prices,” said Kirk Edwards, president of Latigo Petroleum, which has interests in 2,000 oil and natural gas wells in Texas and Oklahoma. He was recalling a time of so little demand and storage capacity that some traders paid buyers to take oil off their hands.If the drillers don’t increase production, fuel prices could stay high and even rise. That would present a political problem for Mr. Biden. Many Americans, especially lower-income families, are vulnerable to big swings in oil and gas prices. And while use of renewable energy and electric cars is growing, it remains too small to meaningfully offset the pain of higher gasoline and natural gas prices.Goldman Sachs analysts say energy supplies could further tighten, potentially raising oil prices by $10 before the end of the year.That helps explain why the Biden administration has been pressing the Organization of the Petroleum Exporting Countries to produce more oil. “We continue to speak to international partners, including OPEC, on the importance of competitive markets and setting prices and doing more to support the recovery,” Jen Psaki, Mr. Biden’s press secretary, said last week.But OPEC and its allies on Monday merely reconfirmed existing plans for a modest rise in November. They are reluctant to produce more for the same reasons that many U.S. oil and gas companies are unwilling to do so.Oil executives contend that while prices may seem high, there is no guarantee that they will stay elevated, especially if the global economy weakens because coronavirus cases begin to increase again. Since the pandemic began, the oil industry has laid off tens of thousands of workers, and dozens of companies have gone bankrupt or loaded up on debt.Oil prices may seem high relative to 2020, but they are not stratospheric, executives said. Prices were in the same territory in the middle of 2018 and are still some ways from the $100-a-barrel level they topped as recently as 2014.Largely because of the industry’s caution, the nationwide count of rigs producing oil is 528, roughly half its 2019 peak. Still, aside from recent interruptions in Gulf of Mexico production from Hurricane Ida, U.S. oil output has nearly recovered to prepandemic days as companies pull crude out of wells they drilled years ago.Another reason for the pullback from drilling is that banks and investors are reluctant to put more money into the oil and gas business. The flow of capital from Wall Street has slowed to a trickle after a decade in which investors poured over $1.4 trillion into North American oil and gas producers through stock and bond issues and loans, according to the research firm Dealogic.“The banks have pulled away from financing,” said Scott Sheffield, chief executive of Pioneer Natural Resources, a major Texas oil and gas producer. The flow of money supplied by banks and other investors had slowed even before the pandemic because shale wells often produced a lot of oil and gas at first but were quickly depleted. Many oil producers generated little if any profit, which led to bankruptcies whenever energy prices fell.Companies constantly sold stock or borrowed money to drill new wells. Pioneer, for example, did not generate cash as a business between 2008 and 2020. Instead, it used up $3.8 billion running its operations and making capital investments, according to the company’s financial statements.Industry executives have come to preach financial conservatism and tell shareholders they’re going to raise dividends and buy back more stock, not borrow for big expansions. Mr. Sheffield said Pioneer now intended to return 80 percent of its free cash flow, a measure of money generated from operations, to shareholders. “The model has totally changed,” he said.Among oil executives, there are still vivid memories of the collapse in energy prices last year, as the pandemic curtailed commuting and travel.Tamir Kalifa for The New York TimesOil company shares, after years of declines, have soared this year. Still, investors remain reluctant to finance a big expansion in production.With oil and gas exploration and production businesses taking a cautious approach and returning money to shareholders, the first company “that deviates from that strategy will be vilified by public investors,” said Ben Dell, managing director of Kimmeridge, an energy-focused private equity firm. “No one is going down that path soon.”This aversion to expanding oil and gas production is driven in part by investors’ growing enthusiasm for renewable energy. Stock funds focusing on investments like wind and solar energy manage $1.3 trillion in assets, a 40 percent increase this year, according to RBC Capital.And the biggest investment firms are demanding that companies cut emissions from their operations and products, which is much harder for oil and gas companies than for technology companies or other service-sector businesses.BlackRock, the world’s largest asset manager, wants the businesses it invests in to eventually remove as much carbon dioxide from the environment as they emit, reaching what is known as net-zero emissions. The New York State Common Retirement Fund, which manages the pension funds of state and local government workers, has said it will stop investing in companies that aren’t taking sufficient steps to reduce carbon emissions.But even some investors pushing for emissions reductions express concern that the transition from fossil fuels could drive up energy prices too much too quickly.Mr. Dell said limited supply of oil and natural gas and the cost of investing in renewable energy — and battery storage for when the sun is not shining and the wind is not blowing — could raise energy prices for the foreseeable future. “I am a believer that you’re going to see a period of inflating energy prices this decade,” he said.Laurence D. Fink, chairman and chief executive of BlackRock, said this could undermine political support for moving away from fossil fuels.“We risk a supply crisis that drives up costs for consumers — especially those who can least afford it — and risks making the transition politically untenable,” he said in a speech in July.There are already signs of stress around the world. Europe and Asia are running low on natural gas, causing prices to rise even before the first winter chill. Russia, a major gas supplier to both regions, has provided less gas than its customers expected, making it hard for some countries to replace nuclear and coal power plants with ones running on gas.OPEC, Russia and others have been careful not to raise oil production for fear that prices could fall if they flood the market. Saudi Arabia, the United Arab Emirates, Russia and a few other producers have roughly eight million barrels of spare capacity.“The market is not structurally short on oil supply,” said Bjornar Tonhaugen, head of oil markets for Rystad Energy, a Norwegian energy consulting firm.Helima Croft, head of global commodity strategy at RBC Capital Markets, said she expected that OPEC and Russia would be willing to raise production if they saw the balance between supply and demand “tighten from here.”If OPEC raises production, U.S. producers like Mr. Edwards of Latigo Petroleum will be even more reluctant to drill. So far, he has stuck to the investment plans he made at the beginning of the year to drill just eight new wells over the last eight months.“Just because prices have jumped for a month or two doesn’t mean there will be a stampede of drilling rigs,” he said. “The industry always goes up and down.”Clifford Krauss reported from Houston, and Peter Eavis from New York. More

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    These Online Publications Are Not Free … and Readers Don’t Mind

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    Defector, The Daily Memphian, The Dispatch and other outlets of recent vintage are driving a shift in the digital media business.You had to pay to get in.Roughly 250 people paid $15 or $20 apiece to attend a party hosted by the staff of Defector, a subscription website started a year ago by journalists who had quit (or were fired from) the sports news site Deadspin after refusing to heed a request from their bosses that they “stick to sports.”The party guests were accustomed to paying. They were Defector subscribers, for the most part, meaning they had paid $79 for a year’s subscription, allowing them to get past a strict paywall to read articles like “What 1993 Video Game Tony La Russa Taught Me About Baseball” and “Please, I Am Begging You, Stop Putting the Giants in Primetime.” (Subscribers also received the discounted $15 ticket price.)In charging for access to its website, Defector differs from its predecessor, Deadspin, which belongs to a digital-media generation that gives readers free access and tries to make money by selling ads.It remains a challenge for online publications to persuade readers to pay, and it’s perhaps more difficult to get them to pay again after the initial subscription. Defector is optimistic that it will hang on to its fan base as it heads into its second year.In an annual report sent to subscribers on Monday, Defector, which is owned by its employees, reported that nearly all of its $3.2 million in revenue had come from its more than 36,000 subscribers. Roughly 85 percent have renewed for a second year, according to the report, suggesting that the site will pass the do-or-die test.“This is the math problem now, for the rest of eternity,” Tom Ley, the editor in chief, said in an interview last week. “We’ve got to keep this number about where it is, or else we’re in trouble.”The staff of Defector, a subscription website started a year ago by journalists who had quit (or were fired from) the sports news site Deadspin.Gabby Jones for The New York TimesPrint newspapers charged readers for a century, and readers never questioned the idea that they would have to pay for journalism. The first generations of online-only news sites, eager to build their audiences by pulling readers away from old habits, offered up their work free of charge.Defector and the digital newsletter platform Substack are part of a wider shift, one made possible by readers who have come to see paying for journalism as the right thing to do, rather than an annoyance.The Daily Memphian, a nonprofit news site in Memphis, is also part of the wave, with readers contributing the bulk of its revenue. It started in 2018 in response to the shrinking of the local newspaper, The Commercial Appeal. Nearly 17,000 subscribers pay $99 per year (or $12.99 per month) for The Memphian, and they have renewed their subscriptions at a rate of 90 percent, said Eric Barnes, the publication’s chief executive. Ad sales, sponsorships and donations cover the rest of a $5 million annual budget that supports a newsroom of 38.“People paid for news for decades,” Mr. Barnes said. “Why can’t they pay for it now?”The imperative to hold on to subscribers has influenced The Memphian’s journalism, he added, bringing an emphasis on straightforward articles on local issues. The publication connected with readers, for instance, through its coverage of the replacement of East Memphis’s elegant Century Building with a Woodie’s Wash Shack convenience store and carwash.Mr. Barnes added that he was against offering discounts to subscribers, a strategy that is backed by Matt Lindsay, the president of the subscription consultant Mather Economics, who said the price of a subscription was not the main factor for readers who declined to renew.“Usually, it’s some other reason,” said Mr. Lindsay, whose clients include The New York Times. “They lose the habit of reading every day, there’s other competition for their entertainment, someone else has attracted their attention.”The business news site Quartz started in the days of giveaway journalism and made the shift to asking readers to pay in 2018. In addition to 1.3 million regular readers of its newsletters, which are still offered free of charge, it has 27,000 subscribers who pay $99.99 a year (or $14.99 a month), a Quartz spokeswoman said, and the renewal rate is 97 percent.“Listening and responding to readers is what’s necessary for retention,” said Katherine Bell, the editor in chief.Writers who have a significant number of loyal readers have had success on Substack. Heather Havrilesky started publishing extra bits of her advice column for New York magazine, “Ask Polly,” on Substack in 2020 before moving the column there full time. That newsletter — and another, “Ask Molly,” which she described in an email as “written by Polly’s evil twin” — have more than 30,000 subscribers and a paying list above 3,000. The figures have grown every month and especially in recent months, Ms. Havrilesky said.Stephen F. Hayes, the chief executive of The Dispatch, says the key to keeping subscribers is “making sure your stuff is good.”William B. Plowman/NBCSubstack also hosts news outlets run not by solo practitioners like Ms. Havrilesky but by staffs of journalists. The Dispatch, started in 2019 by conservative journalists opposed to Donald J. Trump, has a newsroom of 17, nine newsletters and four podcasts. With 150,000 readers signed up for free newsletters and nearly 30,000 paying subscribers — at $10 per month, or $100 a year — The Dispatch has reached the conclusion of its “start-up phase,” said its chief executive, Stephen F. Hayes.He added that the publication had a 91 percent retention rate, and that the reason was simple: “I still think the first and most important aspect of mitigating churn is making sure your stuff is good.”Still, The Dispatch has recently hired a publishing executive, Justin Fritz, who most recently worked on — what else? — subscriber retention at the sports news site The Athletic. More

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    Inflation Climbs at Fastest Pace in 30 Years as Supply Chain Snarls Linger

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    Inflation, once expected to fade quickly, is proving more stubborn. That ramps up tension among officials as they wait for pressures to fade.The Federal Reserve’s preferred gauge of inflation climbed in August at the quickest pace in 30 years, data released on Friday showed, keeping policymakers on edge as evidence mounts that rapidly rising prices are poised to last longer than practically any of them had expected earlier this year.The numbers come at a pivotal moment, as inflationary warning signals abound. Used car prices show signs of picking up again, costs for raw goods like cotton and crude oil are increasing and companies continue to experience pain from persistent supply chain disruptions.That is stoking fears in Washington and on Wall Street that although rapid price gains will eventually fade, the adjustment could drag on for months. A longer burst of inflation raises the chances that consumers will change their expectations and behavior, paving the way for more permanent price increases.It is a high-stakes juncture for policymakers. The Fed is preparing to withdraw some of its support for the economy soon, but it would prefer to do so only gradually, given the millions of Americans who remain out of work. The White House is trying to pass two big policy packages at the core of President Biden’s economic agenda, and Republicans have begun wielding every new inflation data point as an argument against more federal spending.Pandemic-related disruptions have caused the bulk of this year’s pop in prices, which is why economists and White House officials continue to predict they will eventually recede. A spike in demand from stuck-at-home workers and families for furniture, electronics and other products collided with factory shutdowns in Asia and overwhelmed shipping routes.The inflation measure released on Friday, the Personal Consumption Expenditures index, rose 4.3 percent in the year through August, beating out the previous month’s reading of 4.2 percent. And it is increasingly clear that getting back to normal will not be a quick process. Factory shutdowns continue to ripple through the global supply chain. Shipping snarls may worsen as the holiday season approaches. Rents are rebounding at a breakneck pace after a pandemic swoon, threatening to push housing inflation — an important part of overall price indexes — higher.“It’s still quite an inflationary environment going into next year, and that isn’t going to be good for growth,” said Laura Rosner-Warburton, an economist at the research firm MacroPolicy Perspectives. “They need to be monitoring things very closely. This is a huge shock.”Wages are rising, but in many cases not quickly enough to overcome the rapid run-up in prices, Ms. Rosner-Warburton pointed out. A reduction in purchasing power threatens to create a cycle in which consumers buy less while goods and services are becoming more expensive because of supply limits, a situation often called “stagflation.”That remains a risk — not a baseline expectation — but the possibility of lingering inflation increasingly worries economists, companies and even some policymakers.It is “frustrating to see the bottlenecks and supply chain problems not getting better — in fact, at the margin, apparently getting a little bit worse,” Jerome H. Powell, the Fed’s chair, said while speaking on a panel on Wednesday. “We see that continuing into next year, probably, and holding inflation up longer than we had thought.”Phil Levy, the chief economist at the logistics firm Flexport, said his company expected supply chain issues to begin easing next summer at the earliest. But as labor issues bubble up at long-overburdened ports, that could take even longer.And in the near term, trouble finding shipping space could translate to shortages of toys and trinkets during the holiday season, causing companies to lift prices to make sure their supply lasts, Mr. Levy said.“Ports are under strain, with ships backed up. We are short on truckers. We have warehouses that are packed full,” he said, later adding: “There was a sense a year ago that this would be a short-lived thing — there would be a craze, a squeeze, and then it would let up. The interpretation of ‘transitory’ has changed.”While central bankers have long expected price gains to slow down, their guesses at how quickly that moderation will happen have been increasingly glum. In their latest economic projections, Fed officials forecast that the Personal Consumption Expenditures index will average 4.2 percent in the final quarter of 2021 — up from 3.4 percent in their June estimates — before declining to 2.2 percent by the end of next year.The Fed aims for 2 percent inflation on average over time, though it is happy to tolerate higher periods as long as they are not expected to last.Today’s price problem is a surprising one. Central bankers across advanced economies had spent most of the last decade wrestling with too-low, rather than too-high, inflation. That’s one of the reasons officials expect price gains to cool — once the pandemic shock recedes, long-running forces like population aging and technology should dominate.But for now, officials are watching to make sure the current jump fades, and they are positioning themselves for the possibility that it might not.The Fed clearly signaled at its latest meeting that it could announce a plan to dial back its big bond-buying program as soon as November, the first step in removing monetary policy support for the economy. Some Fed officials have pointed out that bringing the bond-buying program to a close soon could leave the central bank more nimble, should it find that it needs to raise interest rates — its more powerful tool, currently still near zero — to tamp down demand and wrestle inflation back to its goal.Inflation and supply issues also pose a headache for President Biden’s White House, as rising costs chip away at voters’ paychecks and as houses and cars prove sharply more expensive and difficult to buy.Administration officials are focusing on the fact that a “core” price index, which strips out volatile food and fuel prices, has been slowing somewhat on a monthly basis, a senior White House official said on Friday. That measure climbed 0.3 percent in August from July, roughly the same as the previous month and down from a peak of 0.6 percent earlier this year.But the headline-grabbing annual numbers are giving Republicans political fodder, with many blaming the jump in prices on government spending and using it to argue against additional outlays.Container ships waiting at sea to dock at the Los Angeles Port this week.Etienne Laurent/EPA, via Shutterstock“Regardless of what the White House press team says, I think people are really seeing the impact of higher prices, day in, day out,” Representative Bryan Steil, a Republican from Wisconsin, said while questioning Treasury Secretary Janet L. Yellen and Mr. Powell during a hearing on Thursday. He later suggested that “runaway spending” in Washington would increase consumer inflation expectations.The White House argues that stimulus from Mr. Biden’s infrastructure and social spending legislation would trickle out over time and could improve economic capacity, relieving supply chain pressures over the longer run.But the administration and Fed alike are watching closely to make sure that consumers do not come to expect ever-higher prices amid today’s burst in inflation.“The real question is, when your boss says, ‘Hey, I’m giving you a 4 percent raise this year,’ are you happy or upset?” Mr. Levy, the Flexport economist, said. “Once that stuff gets built in, it can be very painful to change.”Encouragingly, consumer and financial market expectations of where inflation will settle over the longer term — typically five years — seem to have leveled off after climbing slightly earlier in 2021. Still, companies are planning for the possibility that supply chain disruptions and rising costs will persist for some time.“We’re not expecting supply chain pressures to ease,” Mark J. Tritton, chief executive officer at Bed Bath & Beyond, said during an earnings call on Friday. He noted that the company was trying to adjust how it operated to deal with the issues, including by trying to carefully manage inventory.General Motors and Honda both reported significant declines from a year earlier in sales during the three months that ended in September as chip shortages forced them to idle plants, leaving dealers with few vehicles to offer customers. And as used cars remain in short supply, their prices — a major driver of inflation this year — could rise again.The pain is being felt across many advanced economies: Inflation in the eurozone climbed to 3.4 percent in September from a year earlier, the highest in 13 years, according to an estimate by the region’s statistical agency released on Friday.Omair Sharif, founder of the research firm Inflation Insights, said he still expected U.S. price increases to fade to more normal levels by the middle of next year — but acknowledged that it was going to take longer to resolve supply problems than he would have expected even three months ago.“We just had blinders on with the global supply chain,” he said.Neal E. Boudette More

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    Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign.

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    Many experts are rethinking longstanding core ideas, including the importance of inflation expectations.It has long been a central tenet of mainstream economic theory that public fears of inflation tend to be self-fulfilling.Now though, a cheeky and even gleeful takedown of this idea has emerged from an unlikely source, a senior adviser at the Federal Reserve named Jeremy B. Rudd. His 27-page paper, published as part of the Fed’s Finance and Economics Discussion Series, has become what passes for a viral sensation among economists.The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today. That is especially important right now, in trying to figure out whether the current inflation surge is temporary or not.But the Rudd paper is part of something bigger still. It reflects a broader rethinking of core ideas about how the economy works and how policymakers, especially at central banks, try to manage things. This shift has also included debates about the relationship between unemployment and inflation, how deficit spending affects the economy, and much more.In effect, many of the key ideas underlying economic policy during the Great Moderation — the period of relatively steady growth and low inflation from the mid-1980s to 2007 that also seems to be a high-water mark for economists’ overconfidence — increasingly look to be at best incomplete, and at worst wrong.It is vivid evidence that macroeconomics, despite the thousands of highly intelligent people over centuries who have tried to figure it out, remains, to an uncomfortable degree, a black box. The ways that millions of people bounce off one another — buying and selling, lending and borrowing, intersecting with governments and central banks and businesses and everything else around us — amount to a system so complex that no human fully comprehends it.“Macroeconomics behaves like we’re doing physics after the quantum revolution, that we really understand at a fundamental level the forces around us,” said Adam Posen, president of the Peterson Institute for International Economics, in an interview. “We’re really at the level of Galileo and Copernicus,” just figuring out the basics of how the universe works.“It requires more humility and acceptance that not everything fits into one model yet,” he said.Or put less politely, as Mr. Rudd writes in the first sentence of his paper, “Mainstream economics is replete with ideas that ‘everyone knows’ to be true, but that are actually arrant nonsense.”One reason for this, he posits: “The economy is a complicated system that is inherently difficult to understand, so propositions like these” — the arrant nonsense in question — “are all that saves us from intellectual nihilism.”And from that starting point, a staff economist at the world’s most powerful central bank went on to say, in effect, that his own employer has been focused on the wrong things for the last few decades.Dockworkers unloading cars in Baltimore in 1971. Importers were worried about the effect of the 10 percent duty imposed by President Nixon on foreign-made items as part of his new economic “game plan” to halt inflation.Bettmann/Getty ImagesMainstream policymakers, very much including Mr. Rudd’s bosses at the Fed, believe that inflation is, in large part, self-fulfilling — that what people expect future inflation to look like has an ability to shape how much prices rise in the near term.In the common telling, the Great Inflation of the 1970s got going because people came to believe inflation would keep spiraling. The surge in gasoline prices wasn’t simply a frustrating development, but a harbinger of things to come, so people needed to demand higher raises, and businesses could feel confident charging higher prices for most everything.In this story, the great achievement of the Fed in the early 1980s was to break this cycle by re-establishing credibility that it would not allow sustained high inflation (though at the cost of a severe recession).That is why today’s discussions over the inflation outlook often spend a lot of time focusing on things like what bond prices suggest inflation will be five or 10 years from now, or how people answer survey questions about what they expect.Mr. Rudd argues that there is no solid evidence that the conventional story of the 1970s describes the real mechanism through which inflation takes place. He says there’s a simpler explanation consistent with the data: that businesses and workers arrive at prices and wages based on the conditions they’ve experienced in the recent past, not some abstract future forecast.For example, when inflation has been low in the recent past, workers might not demand raises as they would in a world where inflation was high; after all, their existing paychecks go pretty much as far as they used to. You don’t need some theory involving inflation expectations to get there.Some economists who are sympathetic to the idea that central bankers have overly fetishized precise measurements of inflation expectations aren’t ready to fully dismiss the idea.For example, Mr. Posen, a former Bank of England policymaker, says there remains a simple and hard-to-dispute idea about inflation expectations supported by lots of history: that if people distrust a country’s monetary system, inflation shocks can spiral upward. Economic policy credibility matters. But that isn’t the same as assuming that some survey or bond market measure of what will happen to inflation in the distant future is particularly meaningful for forecasting the near future.“It has been a noble lie that has become a critical part of the catechism of global monetary policy, that long-term inflation expectations are not just interesting but are a decisive determinant of real-time inflation,” said Paul McCulley, a former Pimco chief economist, commenting on Mr. Rudd’s paper.This isn’t the only way in which basic precepts underlying economic policy are shifting beneath economists’ feet.Particularly prominently, for years central bankers believed there was a tight relationship between the unemployment rate and inflation, known as the Phillips Curve. Over the course of the 2000s, though, that relationship appeared to weaken and become a less reliable guideline for how to set policy.Similarly, interest rates and inflation fell worldwide, for reasons that scholars are still trying to understand fully. That implied a lower “neutral interest rate,” or the rate that neither stimulates nor slows the economy, than was widely believed to be the case as recently as the mid-2010s.In many ways, the Fed’s policies just before the pandemic were aimed at incorporating those lessons and embracing sustained lower interest rates — and the possibility of lower unemployment — than many in the mainstream thought reasonable a few years earlier.In the realm of fiscal policy, some conventional wisdom has also been upended in the last few years. It was thought that large government debt issuance would risk causing a spike in interest rates and crowd out private sector investment. But in that period, huge budget deficits have been paired with low interest rates and abundant credit for businesses.All of this makes it a challenging time for central bankers and other shapers of policy. “If you’re a policymaker and you don’t have robust confidence in the parameters of the game you are managing, it makes your job a whole lot more difficult,” Mr. McCulley said.But if you are in charge of making economic policy that affects the lives of millions, you can’t simply shrug your shoulders and say, “We don’t know how the world works, so what are we supposed to do?” You look at the evidence available, and make the best judgment you can.And then, if you think it turns out you were wrong about something, publish a sassy paper to try to get it right. More

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    High Natural Gas Prices Strain Europeans, Weighing on Recovery

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    Crimped supplies and increased demand have pushed energy prices to their highest in years, raising concerns about the winter.LONDON — As the world struggles to recover from the pandemic, soaring natural gas prices threaten to become a drag on the economies of Europe and elsewhere. Wholesale prices for the fuel are at their highest in years — nearly five times where they were at this time in 2019, before people started falling ill with the virus.The high costs feed into electric power prices and have begun showing up in utility bills, weighing on consumers whose personal finances have already been strained by the pandemic. The price jumps are unusual because demand is typically relatively low in the warmer summer months, raising alarms about the prospects for further increases when demand jumps in the winter.Spanish households are paying roughly 40 percent more than what they paid for electricity a year ago as the wholesale price has more than doubled, prompting angry protests against utility companies. “The electricity price hike has created a lot of indignation, and this is of course moving onto the streets,” said María Campuzano, spokeswoman for the Alliance against Energy Poverty, a Spanish association that helps people struggling to pay energy bills.The pain is being felt across Europe, where gas is used for home heating and cooking as well as electric power generation. Citing record natural gas prices, Britain’s energy regulatory agency, Ofgem, recently gave utilities a green light to increase the ceiling on energy bills for millions of households paying standard rates by about 12 percent, to 1,277 pounds, or $1,763, a year.Several trends are to blame for soaring prices, including a resurgence of global demand after pandemic lockdowns, led by China, and a European cold snap in the latter part of winter this year that drained storage levels. The higher-than-expected demand and crimped supply are “a perfect storm,” said Marco Alverà, chief executive of Snam, the large gas company in Milan.The worry is that if Europe has a cold winter, prices could climb further, possibly forcing some factories to temporarily shut down.“If it is cold, then we’re in trouble,” Mr. Alverà said.A Gazprom facility in Siberia. Russia, Europe’s largest gas supplier, and Algeria have substantially increased their exports but not enough to ease market concerns. Maxim Shemetov/ReutersThe jump has prompted some to call for an acceleration of the shift from fossil fuels to clean domestic energy sources like wind and solar power to free consumers from being at the mercy of global commodity markets.“The reality is we need to switch to renewables faster,” said Greg Jackson, chief executive of Octopus Energy, a British utility.On the other hand, the turbulence in prices may also be a harbinger of volatility if energy companies begin to give up on fossil fuel production before renewable sources are ready to pick up the slack, analysts say. In addition, the closure of coal-fired generating plants in Britain and other countries has reduced flexibility in the system, Mr. Alverà said.Gas prices in the United States have risen as well, but they are only around a quarter of those being paid in Europe. The United States has a big price advantage over Europe because of its large domestic supply of relatively cheap gas from shale drilling and other activities, while Europe must import most of its gas. The immediate worry for markets in Europe is that suppliers have not followed their usual practice and used the summer months to fill storage chambers with cheap gas that will be used during the winter, when cold weather more than doubles the consumption of gas in countries like Britain and Germany.Instead, suppliers responded to the cold weather late last winter by draining gas storage facilities. Subsequently, they have been reluctant to top them up with high-priced gas. As a result, European storage facilities are at the depleted levels usual in winter rather than the peaks of fall.“The market is very nervous as we move into the winter season,” said Laura Page, an analyst at Kpler, a research firm. “We have very low storage levels for the time of year.”Europe imports around 60 percent of its gas, with supplies coming by pipeline from Russia and to a lesser extent Algeria and Libya.Liquefied natural gas, arriving by ship from the United States, Qatar and elsewhere, usually helps balance the market. This year, though, L.N.G. carriers have been drawn to higher prices in China, South Korea and Brazil, where a drought has caused a drop in power generated by dams.As a result, Italy, Spain and northwest Europe have seen a sharp decline in liquefied natural gas infusions, according to data from Wood Mackenzie, a market research firm.The dispatching center for Snam, an Italian gas company. Its chief executive said “a perfect storm” of high demand and limited supply had pushed gas prices higher. Gianni Cipriano for The New York TimesAdding to the tight situation in Europe, Groningen, the giant gas field in the Netherlands that long served as a safety valve for both its home country and western Germany, is being gradually shut down because of earthquakes. Over the last year European gas prices have risen from around $4 per million British thermal units to about $18.Russia, the largest gas supplier to Europe, and Algeria have substantially increased their exports but not enough to ease market concerns. Some analysts question whether Gazprom, Russia’s gas company, is pursuing a high-price strategy or trying to persuade the West to allow the completion of its Nord Stream 2 pipeline project, which will deliver gas from Russia to Germany. “On the face of it, it looks as though some sort of game is being played here,” said Graham Freedman, an analyst at Wood Mackenzie. On the other hand, Mr. Freedman said, it could be that Gazprom doesn’t have any more gas to export.A spokeswoman for Gazprom said: “Our mission is to fulfill contractual obligations to our clients, not to ‘reduce the concerns’ of an abstract market.” She added that Gazprom had increased supplies to near-record levels this year.Construction of the 746-mile pipeline, which runs under the Baltic Sea, was halted last year just short of completion off Germany’s shores by the threat of sanctions from the United States. But in a deal with Germany in July, the Biden administration agreed to drop its threat to stop the pipeline. On Monday, the management company for the project said it aimed to have the pipeline operating this year.Stanley Reed reported from London, and Raphael Minder from Madrid. More

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    Prices are Going Up. Will It Last?

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    Prices Are Going Up. Will It Last? Jeanna SmialekBreaking down the numbersScott McIntyre for The New York TimesBikes, used cars and televisions are also costlier.They include parts that are made overseas, like computer chips. With factories and shipping routes upended by the pandemic, these components are more expensive. More