For four decades, the cost of consumer goods was a rare bright spot in the American economy. The stuff we fill our homes and lives with—phones, clothes, makeup, cars, snacks, and toys—got better and cheaper. But no more. Prices were up 6.8 percent year-over-year in February and are near-certain to spike even higher in the coming months. A new Great Inflation is squeezing family budgets, erasing wage gains, and raising the prospect of a period of economic stagnation or even a recession. Given the strong forces driving prices up, costs are likely to get higher before they moderate.
The first force is the coronavirus pandemic: Families are spending more on goods and less on services, and global supply chains have not yet adapted to the new reality. When COVID-19 hit, people quit going to see their personal trainers and set up garage gyms. Families stopped going to restaurants and bought air fryers and barbecue equipment. Two years later, that trend has not reversed: Spending on goods is still roughly 15 percent higher than it was before the pandemic, while spending on services has not recovered.
At the same time the pandemic has increased demand, it has disrupted the world’s supplies of everything from fertilizer to lumber to medical equipment and made it as much as 10 times more expensive to move things around. Infections and lockdowns have made it hard for mines and factories to produce goods. The semiconductor chips used in pretty much every electronic gadget have been in short supply for two years now. The shipping industry, reliant on boats and locks and robots that take years to build, has struggled to expand, too. “Shippers have struggled to locate capacity, with acute shortages of vessel space, container boxes, chassis, warehouse space, intermodal capacity, and labor,” one exhaustive McKinsey report notes.
The Omicron wave sweeping through Asia is now causing another wave of supply disruptions, raising the prospect of another wave of shortages and price increases. This month, Chinese authorities placed the city of Shenzhen and the province of Jilin on lockdown, as cases started to spike. Shenzhen is known as the hardware capital of the world; any sustained closures there will disrupt the market for electronics, with knock-on effects in industries as disparate as auto manufacturing and fast food.
COVID-19 has also caused supply disruptions closer to home, in the domestic manufacturing industry and in the labor force. The pandemic has driven millions of older workers into early retirement and persuaded many younger workers to quit their crappy jobs and hunt for new ones, in what has been termed the “Great Resignation.” At the same time, child-care closures have shunted hundreds of thousands of parents, mostly mothers, out of the labor force, while the pandemic has sickened or killed millions of workers, and left thousands on disability, because of devastating and poorly understood long COVID.
Even so, the American economy has bounced back from the coronavirus recession remarkably well, with unemployment now less than 4 percent, GDP fully recovered, and wages increasing across the board. This is great news, given how sluggish the recovery was from the Great Recession. But the hot economy is the second big cause of the Great Inflation. Interest rates are near zero; the Trump and Biden administrations have spent roughly $3 trillion on support for families and businesses, including sending no-strings-attached monthly checks to nearly every household with children in the second half of 2021. This burst of government largesse has given consumers an unusual capacity to spend, spend, and keep spending—and provided firms more room to raise prices. “To date, we’ve seen no resistance from our customers,” Brian Niccol, the head of Chipotle, said in an interview with CNBC in February.
With corporate profits near their all-time high, Democrats have insisted that price-gouging and greed are additional drivers of today’s rates of inflation. “If gas retailers’ costs are going down, they need to immediately pass those savings on to consumers,” Jen Psaki, the White House press secretary, said this week, chiding energy companies for “any effort to exploit American consumers.” Excess corporate concentration is at work too, they argue: A lack of competition has enabled firms to jack up prices. There’s truth to both points, though they do not explain why prices are going up now.
But Russia’s invasion of Ukraine does, and is a third major factor lifting prices this year. One of the world’s biggest energy exporters is engaged in an unprovoked assault on one of Europe’s largest agricultural exporters. This means higher prices for commodities, which means higher prices for manufacturers, which means higher prices for retailers, which means higher prices for families in a brief matter of time. Much higher, perhaps: One barometer of the price of raw materials jumped 16 percent in the first week of March, the sharpest increase in half a century.
Sanctions on Russia in general and bans on the import of Russian gas in particular are pushing up energy costs, which increases the cost of all other goods. As of last year, Russia was the world’s biggest exporter of natural gas, the second-biggest exporter of crude oil, and the third-biggest exporter of coal. “Affordability is already deteriorating, and security and reliability are faltering,” argues Ryan Severino, the chief economist at Jones Lang Lasalle, a global real-estate and investment firm. “In the short run, this means consumers will simply pay higher prices for whatever energy they can obtain for their immediate needs.”
At the same time, the invasion has cut Europe off from its bread basket: Ukrainian wheat, corn, and sunflower oil are no longer leaving its Black Sea ports. As a result, wheat futures listed on the Chicago Board of Trade jumped the maximum allowed each of the first five days of March; they are now up about 40 percent from before the invasion. Even if Russia were to withdraw from Ukraine shortly, those price increases would probably persist. The war is disrupting the harvest cycle and damaging Ukraine’s shipping infrastructure, and the West is likely to maintain sanctions on Russia for years.
How to slow inflation down? Policy makers have two options: slashing demand and increasing supply. As for the former, the Federal Reserve bumped up interest rates this week. There are 1.7 job openings for every unemployed person, Jerome Powell, the Fed chair, noted at a press conference. “That’s a very, very tight labor market, tight to an unhealthy level, I would say,” he said. “We’re trying to better align demand and supply.” And families and companies are starting to pull back on their own, responding to geopolitical uncertainty and the end of many COVID-era spending programs. As for the latter option to fight inflation, the White House is trying to increase the production of energy, both clean and dirty, and to fix kinks in the supply chain. But there’s not a lot Washington can do to expand capacity in the short term. The White House is also asking Americans to tolerate high gas prices to punish the Kremlin and pressure Russia to withdraw from Ukraine.
Households are just going to have to accept higher prices for as long as the Great Inflation lasts. Alas, there’s a good chance that a recession will end it: Any time inflation has been this high and unemployment this low in the past seven decades, one has followed within a year or two. Six out of the last seven downturns were preceded by spikes in the price of gasoline. In four, geopolitical crises were a proximate cause. If an economic collapse comes soon, rising prices might not seem so bad.