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    Inflation? Not in Japan. And That Could Hold a Warning for the U.S.

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    If the United States’ current bout of rising prices soon eases, its economy could fall back into the cycle of weak inflation that preceded the pandemic — a situation much like Japan’s.TOKYO — In the United States, everyone is talking about inflation. The country’s reopening from the coronavirus pandemic has unleashed pent-up demand for everything from raw materials like lumber to secondhand goods like used cars, pushing up prices at the fastest clip in over a decade.Japan, however, is having the opposite problem. Consumers are paying less for many goods, from Uniqlo parkas to steaming-hot bowls of ramen. While in the United States average prices have jumped by 5.4 percent in the past year, the Japanese economy has faced deflationary pressure, with prices dipping by 0.1 percent in May from the previous year.To some extent, the situation in Japan can be explained by its continued struggles with the coronavirus, which have kept shoppers at home. But deeper forces are also at play. Before the pandemic, prices outside the volatile energy and food sectors had barely budged for years, as Japan never came close to meeting its longtime goal of 2 percent inflation.It wasn’t for lack of trying. Over nearly a decade, Japanese policymakers have wielded nearly every trick in the economist’s playbook in an effort to coax prices higher. They have juiced the economy with cheap money, spent huge sums on fiscal stimulus like public works, and lowered interest rates to levels that made borrowing nearly free.But as Japan has learned the hard way, low inflation can be an economic quagmire. And that experience carries a warning for the United States if its current bout of inflation eases, as many economists expect, and its economy falls back into the cycle of weak inflation that preceded the pandemic.“Most economists, me included, are pretty confident that the Fed knows how to bring inflation down,” including by raising interest rates, said Joshua Hausman, an associate professor of public policy and economics at the University of Michigan who has studied Japan’s economy.However, “it’s much less clear, partly because of Japan’s experience, that we’re very good at bringing inflation up,” he added.For consumers, falling prices sound like a good thing. But from the perspective of most economists, they are a problem.Consumers are paying less for many goods, from Uniqlo parkas to steaming-hot bowls of ramen.Kazuhiro Nogi/Agence France-Presse — Getty ImagesInflation, they like to say, greases the economy’s gears. In small amounts, it increases corporate profits and wages, stimulating growth. It can also reduce the burden of debt, bringing down the relative costs of college loans and mortgages.Japan’s inability to lift inflation is “one of the biggest unsolved challenges in the profession,” said Mark Gertler, a professor of economics at New York University who has studied the issue.One popular explanation for the country’s trouble is that consumers’ expectations of low prices have become so entrenched that it’s basically impossible for companies to raise prices. Economists also point to weakening demand caused by Japan’s aging population, as well as globalization, with cheap, plentiful labor effectively keeping costs low for consumers in developed countries.The picture once looked very different. In the mid-1970s, Japan had some of the highest inflation rates in the world, approaching 25 percent.It wasn’t alone. Runaway prices set off by the 1970s oil crisis defined the era, including for a whole generation of economists who were groomed to believe that the most likely threat to financial stability was rapid inflation and that interest rates were the best tool to combat it.But by the early 1990s, Japan began experiencing a different issue. An economic bubble, fueled by a soaring stock market and rampant property speculation, burst. Prices began to fall.Japan attacked the problem with innovative policies, including using negative interest rates to encourage spending and injecting money into the economy through large-scale asset purchases, a policy known as quantitative easing.Shops and restaurants closed during a state of emergency in Osaka, Japan, in May. To some extent the situation in Japan can be explained by its continued struggles with the coronavirus.Carl Court/Getty ImagesIt seemed to do little good. Still, economists at the time saw Japan’s experience not as a warning to the world, but as an anomaly produced by bad policy choices and cultural quirks.That began to change with the financial crisis of 2008, when inflation rates around the world plummeted and other central banks adopted quantitative easing.The problem has been most notable in Europe, where inflation has averaged 1.2 percent since 2009, economic growth has been weak and some interest rates have been negative for years. During the same period, U.S. inflation averaged just below 2 percent. The Federal Reserve has kept its main interest rate at close to zero since March 2020.Some prominent economists viewed the low inflation as a sign that the U.S. and E.U. economies might be on the brink of so-called secular stagnation, a condition marked by low inflation, low interest rates and sluggish growth.They have worried that those trends will deepen as both economies begin to gray, potentially reducing demand and pushing up savings rates.In 2013, under newly elected Prime Minister Shinzo Abe, Japan began its most ambitious effort to tackle its weak economic growth and low inflation.The government embarked on a grand experiment of huge monetary and fiscal stimulus, buying enormous quantities of equities and lowering interest rates in hopes of encouraging borrowing and putting more money into the economy. As the supply of cash increased, the thinking went, its relative value would decline, effectively driving up prices. Flush with money, consumers and companies alike would spend more. Voilà, inflation.Former Prime Minister Shinzo Abe leaving his last cabinet meeting in Tokyo last year. Under Mr. Abe, Japan began an ambitious but unsuccessful effort to tackle its weak inflation.Kazuhiro Nogi/Agence France-Presse — Getty ImagesTo encourage spending, Japan adopted a policy, known as forward guidance, aimed at convincing people that prices would go up as it pledged to do everything in its power to achieve its inflation target of 2 percent.But the government’s efforts at persuasion fell short, so there was little urgency to spend, said Hiroshi Nakaso, a former deputy governor of the Bank of Japan and head of the Daiwa Institute of Research.Japan found itself in a vicious circle, said Takatoshi Ito, a professor of international and public affairs at Columbia University, who served on Japan’s Council on Economic and Fiscal Policy.Consumers came to expect “stable prices and zero inflation,” he said, adding that as a result, “companies are afraid of raising prices, because that would attract attention, and consumers may revolt.”The sluggish economy made companies reluctant to raise wages, he said, “and because real wages didn’t go up, probably consumption didn’t go up. So there was no increase for demand for products and services.”As inflation hardly moved, some economists wondered if Japan’s stimulus had been too conservative, even as it racked up one of the world’s largest debt burdens.Policymakers, citing a need to pay off the country’s debts and meet the growing costs of caring for an aging population, hedged against the spending by twice raising the country’s consumption tax, apparently weakening demand.A bus station in Tokyo. Economists point to Japan’s aging population as one reason for weakening demand.Charly Triballeau/Agence France-Presse — Getty ImagesIn the end, Mr. Abe’s experiment, known as Abenomics, may not have been as successful as hoped. But it has informed policymakers’ response to the pandemic, said Gene Park, a professor of political science at Loyola Marymount University in Los Angeles who studies Japan’s monetary policy.One takeaway, he said, is that governments could spend more than they had ever thought possible without setting off a rapid rise in inflation. Another is that they might have to spend considerably more than they had once considered necessary to stimulate growth.Japan “has given the U.S. more freedom to experiment with bolder measures,” Mr. Park said.During the pandemic, Japan, too, has tried to apply the lessons learned since 2013.The government has paid shops and restaurants to stay closed, handed out cash to every person in the country, and financed zero-interest loans for struggling businesses. Prices fell anyway. That was partly at the behest of the government itself, which recently pressured telecom companies to lower mobile phone fees it deemed too high. Most Japanese consumers are also still waiting to be vaccinated against the coronavirus, holding back economic activity.Even after the pandemic wanes, however, Japan’s inflation rates are likely to stay low, said Sayuri Shirai, an economics professor at Keio University in Tokyo and a former board member of the Bank of Japan.After all, the primary problem remains unchanged: No one is really sure why prices have stagnated.“The central bank probably doesn’t want to say that they cannot control inflation,” Ms. Shirai said. “Therefore, this issue has just been left without a clear discussion.” More

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    Inflation Likely to Remain High in Coming Months, Fed Chair Powell Says

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    Price gains are up “notably,” Jerome Powell told House lawmakers. That’s because of several temporary factors.Jerome H. Powell told House lawmakers that inflation had increased “notably” in the country’s reopening from the pandemic and would most likely stay higher in the next months before moderating.Pool photo by Graeme JenningsJerome H. Powell, the Federal Reserve chair, told House lawmakers on Wednesday that inflation had increased “notably” and was poised to remain higher in coming months before moderating — but he gave no indication that the recent jump in prices will spur central bankers to rush to change policy.The Fed chair attributed rapid price gains to factors tied to the economy’s reopening from the pandemic, and indicated in response to questioning that Fed officials expected inflation to begin calming in six months or so.Mr. Powell testified before the Financial Services Committee at a fraught moment both politically and economically, given the recent spike in inflation. The Consumer Price Index jumped 5.4 percent in June from a year earlier, the biggest increase since 2008 and a larger move than economists had expected. Price pressures appear poised to last longer than policymakers at the White House or Fed anticipated.“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Mr. Powell said in his opening remarks.He later acknowledged that “the incoming inflation data have been higher than expected and hoped for,” but he said the gains were coming from a “small group” of goods and services directly tied to reopening.Mr. Powell attributed the continuing pop in prices to a series of factors: temporary data quirks, supply constraints that ought to “partially reverse” and a surge in demand for services that were hit hard by the pandemic.He said longer-run inflation expectations remained under control — which matters because inflation outlooks help shape the future path for prices. And he made it clear that if the situation got out of hand, the Fed would be prepared to react.“We are monitoring the situation very carefully, and we are committed to price stability,” Mr. Powell said. He added that “if we were to see that inflation were remaining high and remaining materially higher above our target for a period of time — and that it was threatening to uproot inflation expectations and create a risk of a longer period of inflation — then we would absolutely change our policy as appropriate.”For now, the Fed chair voiced comfort with the central bank’s relatively patient policy path even in light of the hotter-than-expected price data. He said that the labor market was improving but that “there is still a long way to go.” He also said the Fed’s goal of achieving “substantial further progress” toward its economic goals before taking the first steps toward a more normal policy setting “is still a ways off.”Fed officials are debating when and how to slow their $120 billion of monthly government-backed bond purchases, which would be the first step in moving policy away from an emergency mode. Those discussions will continue “in coming meetings,” Mr. Powell said.The central bank is also keeping its policy interest rate near zero, which helps borrowing remain cheap for consumers and businesses. Officials have set out a higher standard for lifting that rate from rock bottom: They want the economy to return to full employment and inflation to be on track to average 2 percent over time.The Fed’s guidance states that officials want to see inflation “moderately” above 2 percent for a time, and Mr. Powell was asked on Wednesday what that standard meant when price pressures were so strong.“Inflation is not moderately above 2 percent — it’s well above 2 percent,” Mr. Powell said of the current data. “The question will be where does this leave us in six months or so — when inflation, as we expect, does move down — how will the guidance work? And it will depend on the path of the economy.”Raising rates is not yet up for discussion, officials have said publicly and privately. The bulk of the Fed’s policy-setting committee does not expect to lift borrowing costs until 2023, based on its latest economic projections.Given Mr. Powell’s comments, that watchful stance is unlikely to shift, economists said.“We still don’t think higher inflation will result in a quicker policy tightening,” Andrew Hunter, senior U.S. economist at Capital Economics, wrote in response to Mr. Powell’s prepared testimony. “Asset purchases probably won’t start to be tapered until next year, with interest rates not raised until the first half of 2023.”The Fed is weighing the risks of higher inflation against the huge number of people who remain out of work. Congress has tasked the central bank with fostering both stable prices and maximum employment. While price pressures have picked up markedly, there are still 6.8 million fewer jobs than there were in February 2020, the month before pandemic layoffs started in earnest.That so many people remain out of work is something of a surprise, because employers report widespread labor shortages, and wage increases and signing bonuses abound as they try to lure talent.“Labor shortages were often cited as a reason firms could not staff at desired levels,” according to the Fed’s latest “Beige Book” of anecdotal economic reports from business contacts across its 12 districts. “All districts noted an increased use of nonwage cash incentives to attract and retain workers.”Mr. Powell said he expected people to return to work as health concerns abated and other issues keeping people sidelined faded, and he predicted that “job gains should be strong in coming months.” More

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    C.P.I. Climbed 5.4 Percent in June

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    A key measure of inflation jumped sharply in June, a gain that is sure to keep concerns over rising prices front and center at the White House and Federal Reserve.The Consumer Price Index climbed by 5.4 percent in the year through June, the Labor Department said, as prices for used cars and trucks increased rapidly. The increase was more than the 5 percent increase reported in May and was the largest year-over-year gain since 2008.Investors, lawmakers and central bank officials are closely watching inflation, which has been elevated in recent months by both a quirk in the data and by mismatches between demand and supply as the economy rebounds. Quick price gains can squeeze consumers if wages do not keep up, and the pickup could prod the central bank to pull back on support for the economy if it looks if the inflation is going to prove sustained. The Fed’s cheap-money policies are generally good for markets, so a rapid withdrawal would be bad news for investors in stocks and other asset classes.Policymakers expect inflation will fade as the economy gets through a volatile pandemic reopening period, but how quickly that will happen is unclear. Prices have climbed faster than officials at the Fed had predicted earlier this year, certain measures of consumer inflation expectations have risen — something that could make inflation a self-fulfilling prophecy if it becomes more extreme — and some officials at the central bank are increasingly wary. At the same time, markets have become more sanguine about the outlook for inflation. The index rose 0.9 percent from May to June, faster than the 0.6 percent month-over-month increase the prior month and far more than economists had expected.Stripping out volatile food and fuel costs, the C.P.I. also climbed 0.9 percent over the month, up from 0.7 percent the prior month.Part of the annual jump owes to a data quirk. The “base effect” is a wonky way to say that because prices fell last year, gains in the price index look artificially high this year. The quirk was at its most extreme in May, and started to fade slightly in June’s data, though it remains a factor behind the larger-than-usual increase.This is a developing story. Check back for updates. More

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    The Bond Market Is Telling Us to Worry About Growth, Not Inflation

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    The economy remains hot, but the future is looking less buoyant than it did just a short while ago.Steam rising from a grate in New York’s financial district on Thursday morning. Swings in the bond market this week pointed to more subdued expectations about inflation.Mark Lennihan/Associated PressFor months, the United States has been experiencing the growing pains of an economy rebooting itself — surging economic activity, yes, but also shortages, gummed-up supply networks and higher prices.Now, shifts in financial markets point to a reversal of that economic narrative. Specifically, the bond market has swung in ways that suggest that a period of slower growth and more subdued inflation could lie ahead.The yield on 10-year Treasury bonds fell to 1.29 percent on Thursday, down from a recent high of 1.75 percent at the end of March and the fourth straight trading day of decline. The closing price of inflation-protected bonds implied expectations of consumer price inflation at 2.25 percent a year over the coming decade, down from 2.54 percent in early May.These are hardly panic-worthy numbers. They are not the kind of jaw-dropping swings that markets show in moments of extreme turbulence, and analysts attribute the moves in significant part to technical factors as big investors shift their portfolios.Moreover, there is a reasonable argument that the economy will be better over the medium term if it experiences moderate growth and low inflation, as opposed to the kind of breakneck growth — paired with shortages and inflation — seen in the last few months.But the price swings do show an economy in flux, and they undermine arguments that the United States is settling into a new, high-inflation reality for the indefinite future.In effect, the bet in markets on explosive growth and resulting inflation is giving way to a more mixed story. The economy remains hot at the moment; the quarter that just ended will most likely turn out to be one of the strongest for growth in history. But market prices aim to reflect the future, not the present, and the future is looking less buoyant than it did not long ago.The peak months for injection of federal stimulus dollars into the economy have passed. The legislative outlook for major federal initiatives on infrastructure and family support has become murkier. The rapid spread of the Delta variant of Covid-19 has brought new concern for the global economic outlook, especially in places with low vaccination rates. That, in turn, could both hold back demand for American exports and cause continued supply problems that result in slower growth in the United States.“The overriding concern being reflected in the bond market is that peak growth has been reached, and the benefits from fiscal policy are starting to fade,” said Sophie Griffiths, a market analyst with the foreign exchange brokerage Oanda, in a research note.The evidence of a more measured growth path was evident, for example, in a report from the Institute for Supply Management this week. It showed the service sector was continuing to expand rapidly in June, but considerably less rapidly than it had in May. Anecdotes included in the report supported the idea that supply problems were holding back the pace of expansion.“Business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous,” reported one anonymous retailer that participated in the I.S.M. survey. “We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market.”The bond market shifts could leave the Federal Reserve wrong-footed in contemplating plans to unwind its efforts to support the economy. At a policy meeting three weeks ago, some Fed officials were ready to proceed with tapering bond purchases in the near future, and some expected to raise interest rates next year, in contrast with a more patient approach that Jerome Powell, the Fed chairman, has advocated.In one of the odder paradoxes of monetary policy, what was perceived in markets as greater openness at the Fed to raising interest rates has contributed to declines in long-term interest rates. Global investors are betting that potential pre-emptive monetary tightening will cause a stronger dollar, slower growth and less ability for the Fed to raise rates in the future without tanking the economy.“The market read the views of the minority within the Fed about tapering and about raising rates as signals the Fed has blinked on its decision to allow the economy to run hot,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities. “A weaker global economy and stronger U.S. dollar all imply greater potential for us to import global deflation.”There are silver linings to the reassessment taking place in markets. Lower long-term rates make borrowing cheaper for Americans — whether that is Congress and the Biden administration considering how to pay for infrastructure plans, or home buyers trying to afford a house.And the adjustment in bond prices can give Fed officials more confidence that inflation is set to be consistent with their goals in the years ahead, even as businesses face supply shortages and spiking wages at the moment.For example, bond prices now imply that inflation will be 2.1 percent per year between five and 10 years from now, down from expectations of 2.4 percent in early May. The Fed aims for 2 percent inflation (though targeting a different inflation measure from the one that is used in the value of inflation-protected bonds).That could make it less likely the Fed acts prematurely out of fear that inflation will get out of control, recent communication problems notwithstanding.Markets aren’t all-knowing, and the signals being sent by bond prices could turn out to be wrong. But investors with, collectively, trillions of dollars on the line are betting that the rip-roaring economy of summer 2021 is going to give way to something a good bit less exciting. More

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    Gas Price Increase Poses Challenge to U.S. Economy

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    Experts say a period of costlier fuel is likely to be brief. But if consumers start to assume otherwise, it could mean problems for Biden and the Fed.As the U.S. economy struggles to emerge from its pandemic-induced hibernation, consumers and businesses have encountered product shortages, hiring difficulties and often conflicting public health guidance, among other challenges.Now the recovery faces a more familiar foe: rising oil and gasoline prices.West Texas Intermediate, the U.S. oil-price benchmark, hit $76.98 a barrel on Tuesday, its highest level in six years, as OPEC, Russia and their allies again failed to agree on production increases. Prices moderated later in the day but remained nearly $10 a barrel higher than in mid-May.Reflecting the increase in crude prices, the average price of a gallon of regular gasoline in the United States has risen to $3.13, according to AAA, up from $3.05 a month ago. A year ago, as the coronavirus kept people home, gas cost just $2.18 a gallon on average. The auto club said on Tuesday that it expected prices to increase another 10 to 20 cents through the end of August.The price of a gallon of gas

    Note: Weekly prices through Monday. Data is not seasonally adjusted and includes all formulations of regular gasoline.Source: Energy Information AdministrationBy The New York TimesThe rapid run-up comes at a delicate moment for the U.S. economy, which was already experiencing the fastest inflation in years amid resurgent consumer activity and supply-chain bottlenecks. And it could cause a political headache for President Biden as he tries to convince the public that his policies are helping the country regain its footing.Asked about oil prices at a White House news conference on Tuesday, Jen Psaki, the press secretary, said the administration was monitoring the situation and had been in touch with officials from Saudi Arabia and other major producers. But she suggested that the president had limited control over gas prices.“There sometimes is a misunderstanding of what causes gas prices to increase,” Ms. Psaki said. “The supply availability of oil has a huge impact.”Indeed, energy experts said the recent jump in oil prices had more to do with global economic and geopolitical forces than with domestic policies. Global energy demand slumped when the pandemic hit last year, eventually leading the Organization of the Petroleum Exporting Countries and its allies to cut production to prevent a collapse in prices. Demand has begun to rebound as economic activity resumes, but production has not kept pace: OPEC Plus, the alliance of oil producers, on Monday called off a teleconference to discuss increasing output.The direct economic impact of higher oil prices will probably be substantially more modest than in past decades. Energy overall plays a smaller role in the economy because of improved efficiency and a shift away from manufacturing, and the rise of renewable energy means the United States is less reliant on oil in particular.In addition, the surge in domestic oil production in recent years means that rising oil prices are no longer an unambiguous negative for the U.S. economy: Higher prices are bad news for drivers and consumers, but good news for oil companies and their workers, and the vast network of equipment manufacturers and service providers that supply them. Joe Brusuelas, chief economist at the accounting firm RSM, said oil prices of $80 or even $100 a barrel didn’t concern him. Not until prices top $120 a barrel would he start to worry seriously about the economic impact, he said.“The world has changed,” Mr. Brusuelas said. “The risks aren’t what they once were.”Still, the costs of higher prices will not be felt equally. Poor and working-class Americans drive older, less efficient cars and trucks and spend more of their incomes on fuel.Higher oil prices are no longer an altogether bad thing for the U.S. economy, but they are a particular burden to poor and working-class Americans.Audra Melton for The New York TimesScott Hanson of Western Springs, Ill., said $40 was enough to fill up his gas tank last year, when he lost his job as an office manager because of the pandemic. Now Mr. Hanson is paying over $60 to fill his Dodge Charger, making trips to take his mother to her medical appointments more expensive. Gas in Illinois is averaging $3.36 a gallon, according to AAA.“It’s too much for too many people that lost their jobs or have low-paying jobs,” Mr. Hanson said. “Everything bad that could happen is happening all at once.”Gas prices also remain a potent and highly visible symbol of rising prices when many consumers — and some economists — are nervous about inflation. Consumer prices rose 5 percent in May from a year earlier, the biggest annual increase in more than a decade, and forecasters expect figures for June, which will be released next week, to show another significant increase.Policymakers at the Federal Reserve have said they expect the increase in inflation to be short-lived, and they are unlikely to change that view based on an increase in energy prices, which are often volatile even in normal times, said Jay Bryson, chief economist at Wells Fargo.But if rising oil prices lead consumers and businesses to believe that faster inflation will continue, that could be a harder problem for the Fed. Economic research suggests that prices of things that consumers buy often, such as food and gasoline, weigh particularly heavily on their expectations for inflation. With public opinion surveys showing increasing concern about inflation, rising oil prices increase the risk of a more lasting shift in expectations, said David Wilcox, a former Fed economist who is now a senior fellow at the Peterson Institute for International Economics in Washington.“I don’t expect the price of oil to be the last straw on the camel’s back, but it is another straw on a camel’s back that’s already carrying a fair amount of baggage,” Mr. Wilcox said. “There is a much greater risk today of an inflationary psychology taking hold than I would have said three to five years ago.”Republicans have seized on rising prices to criticize Mr. Biden’s energy policies, including his decision to cancel permits for the Keystone XL oil pipeline and his pause on selling new oil leases on federal lands, a move that a federal judge has blocked.“Bad policy is already creating conditions like higher gasoline prices that we haven’t seen in a very long time,” Senator John Barrasso, Republican of Wyoming, wrote in an opinion essay last week. (Energy experts say Mr. Biden’s policies have had no meaningful impact on oil prices.)Ms. Psaki noted that Mr. Biden had consistently opposed an increase in the federal gas tax, which some Republican senators and business groups had advocated to help fund spending on infrastructure. The deal Mr. Biden reached with a bipartisan group of senators last month did not include a gas tax increase.“Ensuring Americans don’t bear a burden at the pump continues to be a top priority for the administration writ large,” Ms. Psaki said. “That’s one of the core reasons why the president was opposed — vehemently opposed — to a gas tax and any tax on vehicle mileage, because he felt that would on the backs of Americans. And that was a bottom-line red line for him.”Domestic oil production is expected to rise in coming months as higher prices and rising demand lead companies to step up drilling. But any rebound is likely to be gradual. U.S. oil companies have been cautious about investing in new exploration and production over the last year, even as oil prices have roughly doubled from the first half of 2020, when the pandemic punctured demand. Company executives say they are focused on share buybacks and debt reduction as sales rise.The Energy Department predicts that production will average 11.1 million barrels a day this year and 11.8 million barrels a day in 2022, 400,000 barrels a day less than in 2019.Even without a surge in domestic oil production, many forecasters doubt that prices will continue to rise at their recent pace. OPEC members generally agree that production should increase; they just disagree about how much. And a new nuclear deal with Iran or a thawing of U.S.-Venezuela relations could bring a flood of new supplies. Iran alone could potentially add 2.5 million to three million barrels of oil daily on the global market, or roughly a 3 percent addition to supplies.At the same time, the spread of new coronavirus variants has led some countries to reimpose or tighten restrictions on activity, which could dampen demand for oil. Capital Economics, a forecasting firm, said on Tuesday that it expected oil prices to peak at about $80 a barrel before falling back as supply increases. But the firm said that a collapse in prices or a further spike both remained possible.Reporting was contributed by More

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    Manhattan Real Estate Finally Bounces Back to Normal

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    The volume of sales surges back to pre-pandemic levels, but prices are up just slightly.As vaccination levels rise and businesses reopen, residential real estate has finally bounced back to where it was before Covid devastated New York.In Manhattan this spring, the number of apartments that sold was more than double what it was a year ago, when the city was locked down in the early days of the pandemic, according to a half dozen market reports released Thursday.Though in many ways the market had no where to go but up — apartment showings were restricted for most of last spring — the surge in closed deals is even strong by historical standards. Not since 2015, a time of a major boom, has there been a three-month period with comparable activity, the reports show.There was more of a mixed picture in terms of prices, with co-ops and condos trading for an average of $1.9 million and a median of $1.1 million, up slightly from last spring. Brokers say the so-so improvement can be explained by an oversupply of apartments, which has fueled discounts.But the spike in sales volume seems to have the real estate industry wiping sweat from its troubled brow.“The way people were looking at the city a year ago, it would now be a dystopian hellscape with nine people left in Manhattan,” said Jonathan Miller, the appraiser who wrote the report for the brokerage Douglas Elliman, referencing early fears that many New Yorkers would decamp permanently to the suburbs or second homes outside the city. “But it seems that cooler heads have prevailed.”Though the count of total sales varies from firm to firm because of different methodologies, all showed huge spikes in activity, versus spring 2020, but also compared with this winter.There were 3,417 completed deals from April to June, versus 1,357 deals a year ago, according to Elliman, for a gain of 152 percent. Even when measured against the January to March quarter, when Manhattan had 2,457 sales, this spring seemed particularly busy.In the third quarter of 2015 — the most recent high point — there were 3,654 sales, Mr. Miller said.The Corcoran Group’s report showed a similar increase in sales. “A year-and-a-half after the pandemic began, it’s safe to say that New York City has its mojo back,” Pamela Liebman, Corcoran’s president and chief executive, said in a statement.Buyers over the last few months gravitated toward co-ops, a housing type that had seemed to lose some favor in recent years. Co-ops accounted for 49 percent of all deals, versus 37 percent for existing condos, according to Corcoran. And in the frenzy of the post-pandemic market, downtown seems to have benefited at the expense of uptown, according to Compass, which reported that neighborhoods like Chelsea, SoHo and the East Village accounted for 31 percent of all deals.For Elizabeth Stribling-Kivlan, a senior managing director at Compass, one of the spring’s most heartening developments was improvement in the financial district, a neighborhood that became a veritable ghost town during the pandemic with the emptying out of office buildings. Median prices there soared 33 percent in a year, the largest increase of any neighborhood, she said.Yes, shuttered stores, sleepy business districts and gun violence make Manhattan feel different than before, she said. But with more workers expected to return to offices this fall and beyond, the borough should soon start to resemble its old self.“People are feeling like they want to come back there, they want to see what will come out of this,” she said. “It’s a new era for us.”Prices, though, may have a ways to go. The price per square foot for resale apartments, which is a useful indicator because it controls for the apartment size, Mr. Miller said, actually declined this spring over a year ago, to $1,408 from $1,461, or 3.6 percent.“Prices are still not at parity with a year ago,” he said. The overall discount that buyers are paying on list prices is at 6.4 percent, which is better than 2020 but still higher than the decade average of 4.9 percent. “There still is a Covid discount out there,” Mr. Miller said, “but it’s easing.”Increased inventory in Manhattan also may contribute to the gap between asking and selling prices. There were 7,880 unsold apartments this spring, up from 6,225 in spring 2020, when many sellers pulled their apartments off the market over fears of having strangers in their homes.And while bidding wars have become the norm in many suburban towns, they accounted for only 6.8 percent of all deals in Manhattan this spring, versus 31 percent in the hot market of 2015. “This market is a return to normal,” Mr. Miller said, “whatever ‘normal’ means.”For weekly email updates on residential real estate news, sign up here. Follow us on Twitter: @nytrealestate. More

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    Fed Unity Cracks as Inflation Rises and Officials Debate Future

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    Federal Reserve officials are debating what to do as price risks loom, even as its leaders and the White House say today’s surge will most likely cool.Federal Reserve officials spoke with one voice throughout the pandemic downturn, promising that monetary policy would be set to full-stimulus mode until the crisis was well and truly behind America. Suddenly, they are less in sync.Central bankers are increasingly divided over how to think about and respond to emerging risks after months of rising asset values and faster-than-expected price increases. While their political counterparts in the White House have been more unified in maintaining that the recent jump in price gains will fade as the economy gets past a reopening burst, Washington as a whole is wrestling with how to approach policy at a moment of intense uncertainty.The Fed’s top officials, including Chair Jerome H. Powell, acknowledge that a lasting period of uncomfortably high inflation is a possibility. But they have said it is more likely that recent price increases, which have come as the economy reopens from its coronavirus slumber, will fade.Other officials, like James Bullard, president of the Federal Reserve Bank of St. Louis, have voiced more pointed concern that the pickup in prices might persist and have suggested that the Fed may need to slow its support for the economy more quickly as a result.Unwanted and persistent inflation seemed like a fringe possibility earlier this year, but it is becoming a central feature of economic policy debates as prices rise for used cars, airline tickets and restaurant meals. For the Fed, the risk that some of the current jump could last is helping to drive the discussion about how soon and how quickly officials should slow down their enormous government-backed bond-buying program — the first step in the central bank’s plan to reduce its emergency support for the economy.Fed officials have said for months that they want to achieve “substantial further progress” toward their goals of full employment and stable inflation before slowing the purchases, and they are just beginning to discuss a plan for that so-called taper. They are now wrestling with the reality that the nation is still missing 7.6 million jobs while the housing market is booming and prices have moved up faster than expected, prompting a range of views to surface in public and private.The bubbling debate reinforces that the central bank’s easy money policies won’t last forever, and sends a signal to markets that officials are closely attuned to inflationary pressures.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” said Jerome Powell, the Fed chair.Al Drago/The New York Times“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, who is president of the Federal Reserve Bank of Dallas and is one of the people pushing for the Fed to soon begin to pull back support. “In a situation this complex and this dynamic, if I weren’t seeing debate and disagreement, and there were unanimity, it would make me nervous.”The central bank’s 18 policy officials roundly say that the economy’s path is extremely hard to predict as it reopens from a once-in-a-century pandemic. But how they think about inflation after a string of strong recent price reports — and how they feel the Fed should react — varies.Inflation has spiked because of statistical quirks, but also because consumer demand is outstripping supply as the economy reopens and families open their wallets for dinners out and long-delayed vacations. Bottlenecks that have held up computer chip production and home-building should eventually fade. Some prices that had previously shot up, like those for lumber, are already starting to moderate.But if the reopening weirdness lasts long enough, it could cause businesses and consumers to anticipate higher inflation permanently, and act accordingly. Should that happen, or if workers begin to negotiate higher wages to cover the pop in living costs, faster price gains could stick around.“A new risk is that inflation may surprise still further to the upside as the reopening process continues, beyond the level necessary to simply make up for past misses to the low side,” Mr. Bullard said in a presentation last week. The Fed aims for 2 percent inflation as an average goal over time, without specifying the time frame.Other Fed officials have said today’s price pressures are likely to ease with time, but have not sounded confident that they will entirely disappear.“These upward price pressures may ease as the bottlenecks are worked out, but it could take some time,” Michelle Bowman, one of the Fed’s Washington-based governors, said in a recent speech.The Fed’s top leadership has offered a less alarmed take on the price trajectory. Mr. Powell and John C. Williams, president of the Federal Reserve Bank of New York, have said it is possible that prices could stay higher, but they have also said there’s little evidence so far to suggest that they will.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” Mr. Powell said during congressional testimony on June 22.Mr. Williams has said there is even a risk that inflation could slow. The one-off factors pushing up prices now, like a surge in car prices, could reverse once supply recovers, dragging down future price gains.“You could see inflation coming in lower than expected,” he said last week.Which take on inflation prevails — risk-focused, watchful, or less fretful — will have implications for the economy. Officials are beginning to talk about when and how to slow down their $120 billion in monthly bond-buying, which is split between $80 billion in Treasury securities and $40 billion in government-backed mortgage debt.The Fed has held a discussion about slowing bond-buying before, after the global financial crisis, but that came during the rebound from a deep but otherwise more standard downturn: Demand was weak and the labor market climbed slowly back. This time, conditions are much more volatile since the recession was an anomaly, driven by a pandemic instead of a financial or business shock.In the current setting, officials who are more worried about prices getting out of hand may feel more urgency to dial back their economic stimulus, which stokes demand.“This is a volatile environment; we’ve got upside inflation risk here,” Mr. Bullard said at a separate event last week. “Creating some optionality for the committee might be really useful here, and that will be part of the taper debate going forward.”Mr. Kaplan said he had been vocal about his preferences on when tapering should start during private Fed discussions, though publicly he will say only that he would prefer to start cutting policy support “sooner rather than later.”“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, a Fed official who is pushing to start easing support.Edgard Garrido/ReutersHe thinks moving more quickly to slow bond purchases would take a “risk management” approach to both price gains and asset market excess: reducing the chances of a bad outcome now, which might mean the Fed doesn’t have to raise interest rates as early down the road.Several officials, including Mr. Kaplan and Mr. Bullard, have said it might be wise for the Fed to slow its purchases of mortgage debt more rapidly than they slow bond-buying overall, concerned that the Fed’s buying might be contributing to a hot housing market.But even that conclusion isn’t uniform. Lael Brainard, a Fed governor, and Mary C. Daly, president of the Federal Reserve Bank of San Francisco, have suggested that the mortgage-backed purchases affect financial conditions as a whole — suggesting they may be less keen on cutting them back faster.The price outlook will also inform when the Fed first raises interest rates. The Fed has said that it wants to achieve 2 percent inflation on average over time and maximum employment before lifting borrowing costs away from rock bottom.Rate increases are not yet up for discussion, but Fed officials’ published forecasts show that the policy-setting committee is increasingly divided on when that liftoff will happen. While five expect rates to remain unchanged through late 2023, opinions are otherwise all over the place. Two officials see one increase by the end of that year, three see two, three see three and another three see four. Two think the Fed will have raised rates six times.Both Fed policy debates will affect financial markets. Bond-buying and low rates tend to pump up prices on houses, stocks and other assets, so the Fed’s pullback could cause them to cool off. And they matter for the economy: If the Fed removes support too late and inflation gets out of control, it could take a recession to rein it in again. If it removes its help prematurely, the slowdown in demand could leave output and the labor market weak.The Fed will be working against a changing backdrop as it tries to decide what full employment and stable prices mean in a post-pandemic world. More money from President Biden’s $1.9 trillion economic aid bill will soon begin to flow into the economy. For example, the Treasury Department in July will begin depositing direct monthly payments into the accounts of millions of parents who qualify for an expanded child tax credit.But expanded unemployment insurance benefits are ending in many states. That could leave consumers with less money and slow down demand if it takes would-be workers time to find new jobs.As the trends play out, White House officials will also be watching to see whether the economy is hot or not. The administration is trying to pass a follow-up fiscal package that would focus on longer-term investments, and Republican opposition has centered partly on inflation risks.For Mr. Kaplan at the Fed, the point is to be watchful. He said it was important to learn from the lessons of the post-2008 crisis recovery, when monetary policy support was removed before inflation had meaningfully accelerated — but also to understand that this rebound is unique.“Realizing that this is a different situation is a wise thing,” Mr. Kaplan said. More

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    in Economy

    Markets Work, but Untangling Global Supply Chains Takes Time

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    Decisions made early in the pandemic are having lasting effects on the ability of industries to fulfill surging demand.Auto manufacturing is a complex process with lots of pieces, meaning that the current shortages and higher prices of cars are likely to persist for some time. This is less true of simpler products like lumber.Alyssa Schukar for The New York TimesThe cure for high prices is high prices.That’s an old line used in commodity markets, and it helps explain why the great inflation scare of 2021 has eased some in recent weeks. When the price of something soars because demand outstrips supply, it has a way of self-correcting. Buyers, scared off by high prices, find other options, and sellers crank up production to take advantage of a profit opportunity.It is an idea simple enough to be taught in the first few weeks of any introductory economics class, but one with powerful implications for the American economy as it aims for a post-pandemic reboot.Several of the key products whose prices had soared in the spring have grown less expensive, as producers have increased output and buyers have held tight. This is particularly evident with lumber; as of Friday, its price was down 47 percent from its early-May peak (though still well above historical norms). Sawmills responded to soaring prices by pushing the limits of their capacity.The prices of corn, copper and a variety of other economically important commodities are also down by double-digit percentages since early May. This supports the notion that the inflation the world has been experiencing is transitory — set to ease in the months ahead as the laws of supply and demand take hold.Markets have plenty of flaws and imperfections, but when it comes to allocating scarce goods and sending signals to sellers to make more and buyers to buy less, they work quite well.But just because markets work doesn’t mean they will work instantly. The complexity of the way many of the goods still in short supply are produced, transported and sold means that people in those markets are reluctant to predict the kind of snapback evident in lumber prices.For them, a number of different problems — many but not all caused by the pandemic — are colliding at once, creating supply tangles that are taking time to unravel. In some cases, inflationary forces already set in motion have not yet made their way through to consumers.A common factor: Decisions made early in the pandemic are having long-lasting consequences in fulfilling demand that is surging with Americans’ loaded wallets.“I think we all thought in early 2020, as things were slowing down, ‘We’ve got it, it’s a recession, we know what the standard playbook is,’” said Phil Levy, chief economist of Flexport, a freight company.In a recession, incomes go down and demand for goods goes down. “A lot of shipping lines were cutting service and cutting orders because they didn’t want to get caught with a glut of supply when nobody wanted to ship anything,” he said. “And that turned out to be dramatically wrong.”Now, in what would normally be a slow time of year, container ships are operating at the outer extremes of their capacity. Shipping companies have taken exceptional efforts to create more supply, such as delaying the retirement of ships and pulling ships out of dry dock. But other factors are still holding back importers, like backlogs at ports and lingering ripple effects of the Suez Canal blockage in late March.A widely cited index of transoceanic shipping prices, the Shanghai Containerized Freight Index, is nearly four times its level before the pandemic and has continued rising in recent weeks.Mr. Levy expects prices to plateau at a high level for a while. With the global shipping system stretched to the breaking point, small disruptions could have a bigger impact than usual — the brittleness that comes from a lack of spare capacity.Meanwhile, building new capacity like container ships and expanding ports take time and require shipping companies to make a bet that the current surge of demand is more than temporary. There are signs capacity is increasing, but for now the lagged effects of the early-pandemic retrenchment are more significant.Similarly slow-moving forces are at play in the production of automobiles, a complex product made up of thousands of parts. Since the onset of the pandemic, it has been a nightmare of supply disruption.“In the 30 years I’ve been in automotive supply chains, we’ve seen sustained periods of downturn or sustained periods of upturn,” said Jeoff Burris, the owner of Advanced Purchasing Dynamics in Plymouth, Mich., a consulting firm that advises auto industry and other manufacturing firms on their supply chains. “What we have not seen is 16 months of one type of problem after another.”Now, there are higher prices for base materials like steel and aluminum. There are suppliers being forced to raise wages sharply to keep assembly lines operating. There are semiconductor manufacturers stretched too thin to provide enough computer chips to make as many cars as consumers wish to buy. There have even been shortages of resin, needed in the plastics that are part of a car, caused by Texas winter storms this year. And adding to it all, there are logjams of shipping capacity for materials imported from overseas.“It’s almost like a patient who’s fighting cancer and heart disease and diabetes all at the same time,” Mr. Burris said. The power that automakers usually hold to dissuade suppliers from increasing prices is breaking down, he said, amid the urgency to obtain supplies.And as automakers throttle production, there have been unusual dynamics in the retail side of the market.The inability of automakers to produce at full speed, combined with strong consumer demand, shows up in both obvious (prices are higher than usual) and less obvious ways, said Ivan Drury, senior manager for insights at Edmunds, a publisher of auto industry information. In the past, the “manufacturer’s suggested retail price” was generally a mere suggestion, with dealers negotiating actual sale prices $2,000 to $3,000 below that level for an average car. Now, new cars are typically selling at or only slightly below the suggested retail price, he said.And dealers are resorting to other techniques that restrict sales. With inventories lean, buyers seeking a particularly in-demand car may need to commit to buying it before it has arrived on the lot, sight unseen. Some dealers, he said, will refuse to sell to people from outside the dealer’s area, to ensure that the buyer will generate continuing service revenue.Things are even more wild in the used-car market, where the down-and-up last 16 months for the rental car industry, among other factors, has caused a severe shortage and steep price increases. Used cars and trucks were a major source of overall consumer price inflation in April and May.Mr. Drury doesn’t expect that to change anytime soon. According to Edmunds data, the average trade-in value of a car was still rising through the first three weeks of June, up an additional 2.9 percent after increasing a combined 21 percent in April and May.None of this means that the inflation of the spring will be lasting; plenty of products are experiencing more routine pricing dynamics that bear out the efficiency of the markets. Rather, the complexity of modern global supply chains means that when things get broken, they won’t necessarily get unbroken quickly.Ultimately, the cure for high prices may be high prices. But it takes more than high prices alone. More