Recovery prices rise after COVID. Should we be worried?
As the economy reopens, increased demand and widespread shortages are pushing up prices for Bay Area residents.
This is the latest pain in the COVID-19 pandemic: a paycheck doesn’t go as far as it used to. From food to flights, Bay Area prices are up 3.8% from a year ago.
“Newly vaccinated people are spending, so we have a ‘freedom-driven demand surge.’ Producers need to catch up, ”said Mary C. Daly, president of the Federal Reserve Bank of San Francisco.
The price hike is temporary, she said, and will not flourish in the long and damaging double-digit inflationary spiral of the 1970s.
But it’s a surprising change after prices for most commodities held almost flat before the pandemic and adds an additional burden to those already hard hit. In just two months – from February to April – prices have jumped 1.7%.
In its fastest jump in 13 years, the country’s consumer price index, a measure of the average change in prices paid by American buyers for consumer goods, increased by 4.2% in April during the past year. The Bureau of Labor Statistics will release its May data on June 10.
“The demand for products is very high. However, there is no supply, ”said San Jose’s chef Sammy Reyes. Scott’s Seafood, which recently opened after months of take out and delivery. He pays nearly $ 50 a pound for Australian lobster, up from $ 29 a pound before the pandemic.
“Meat prices are skyrocketing,” Ulrich said. “Fish prices – whether it’s something with sea shipping or air freight – they’ve also skyrocketed.”
This is a sharp reversal from last spring when the wholesale fish and shellfish prices fell by 17.1%. The prices of meat, dairy products and eggs also fell. Businesses closed and layoffs created massive unemployment.
With pent-up demand for leisure travel, last year’s low airfares are gone. The US Travel Association’s April 2021 Travel Price Index, which measures the cost of accommodation, airline tickets and other out-of-home expenses, shows a 9.5% year-over-year increase.
“The demand is great and many desirable destinations and experiences are filling up quickly, with prices a little higher than before the pandemic,” said Nancy Burger of Los Altos’ Ladera trip, which books many trips to Hawaii, which opened in October and offers a safer and easier experience than many international destinations. Last year, one-way flights from San Francisco to Honolulu cost as little as $ 99. Now the cheapest is $ 204.
But even a drive to see the family will cost more. The American Automobile Association predicts that gasoline prices will reach their highest summer prices since 2014. The state average price for a gallon of gasoline is $ 4.06, down from $ 2.77 one year ago.
Meanwhile, products that were expensive during the pandemic – such as wood and cars – remain expensive.
Low inventories and strong demand have resulted in a doubling of lumber prices. Mendocino Redwood Co. shut down its Ukiah-based sawmill for six weeks at the start of the pandemic last year and is now operating 10 hours a day, six days a week to catch. Steel, gypsum and copper also hit record highs.
Almost 13% of customers pay above the sticker price for new cars, according to car buying site Edmunds. The supply of new vehicles is 48% lower than last year.
Because pandemics are rare, there are few historical parallels. But three different factors, all temporary, are involved.
The first is what economists call “base effects”. A year-to-year comparison exaggerates the magnitude of inflation – the rate of price change over time – as so many prices fell in the early months of the pandemic. The comparison exaggerates what is really going on.
“At the height of the crisis, commodity prices for oil, metals, food… they all collapsed,” the UC Berkeley economist said. Yuri Gorodnichenko.
Second, COVID-19 has created chaos and confusion in supply chains and global shipping markets.
There have been pandemic-induced labor shortages in the fishing, agriculture and meat packaging sectors after months of downturns and closures. Vendors to chefs have cut back on operations after many restaurants have closed and demand plummets. A semiconductor shortage has hampered auto manufacturing, even as consumers frightened by the risks associated with public transportation.
Lobster boats, for example, “didn’t want to bring in lobsters and not have buyers,” said Marianne LaCroix of the Maine Lobster Marketing Collaborative. And processors, also uncertain of the market, limited the amount of lobster they bought and froze.
Now there is pent-up demand. Suddenly everyone wants to dine out, travel or make long-delayed purchases, creating competition for labor and raw materials. Freight prices are skyrocketing and businesses that have suffered losses from the pandemic are trying to recoup their costs. And the increased costs are passed on from farms and factories to stores, restaurants and consumers.
Meanwhile, the government is pumping money into the economy through unemployment checks and stimulus packages, which encourage people to spend.
The economy is simply experiencing a bottleneck in its recovery, Gorodnichenko said. During the pandemic, “producers weren’t sure they had a viable business. Now they have to put it back together. It takes time and money.
Gorodnichenko and other inflation watchers predict that the problems will resolve themselves; that’s how markets work. Producers will catch up and traditional spending models will return, they said. The recent stimulus was important in restarting the economy damaged by the pandemic. And the Federal Reserve has learned from the mistakes of the past how to curb soaring inflation.
“It’s a spectacular recovery. But the economy still has a long way to go before it makes a full recovery, ”he said. “We still have to do a lot of rehabilitation. “