Pricing Pressure Grows as Economy Bounces Back

July 13, 2021

The U.S. economy is heating back up, finding its footing again after a year and a half of COVID-19 disruptions.

But it just might be too much of a good thing.

June prices on all goods and services jumped 5.4 percent from a year ago — the largest increase since August 2008, just before the financial crisis hit its stride.

Seasonally adjusted prices, comparing the shift between May and June, rose 0.9 percent. The increase was fed by a 10.5 percent jump in used car and truck prices, a 0.8 percent rise in food and a 0.7 percent bump in apparel.

The rise in apparel last month came from the women’s category, where prices were up 1.6 percent, led by a 5 percent increase in dress prices and a 2.1 percent rise in outerwear. Prices on suits and separates kept pace with the category overall, rising 1.6 percent, as intimates, swimwear and accessories prices rose 1.1 percent.

The Federal Reserve, which seeks to keep prices in check and the economy growing by adjusting its benchmark interest rates, has generally adopted the stance that price pressures in the economy are due to the COVID-19 disruptions and are “transitory” and set to ease as the pandemic eases.

Economists are watching closely, though, and gauging how the Fed will meet the challenge of the moment and whether it will move to head off price increases with higher interest rates that will in turn cool the stock market.

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“The economy is evolving very fast, and Fed officials still want to operate in a slow and considered mode, akin to what we saw in the years after the financial crisis,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “At some point, policymakers are going to have to wake up and recognize that this is not 2013. Things are moving fast, and the [Fed board that sets interest rates] is not going to have time to spend six months prepping the financial markets for each step along the way toward normalizing monetary policy.”

Stanley said: “I am concerned that the run‐up in labor costs that is coursing through the economy is going to get passed through broadly to consumer prices. We are seeing this already in restaurants and in household operations (though down by 0.9 percent in June, the category had surged by more than 3 percent in May). This is how ‘transitory’ can become ‘persistent.’”