Prepare to Keep Spending More: BU Economist Predicts Inflation to Last Two More Years
Gas prices, normally volatile, are up, but so are many other prices in our first broad-based inflation in years. Photo by Ben Hasty/MediaNews Group/Reading Eagle via Getty Images
Prepare to Keep Spending More: BU Economist Predicts Inflation to Last Two More Years
Tarek Hassan says the good news is that wages are also rising
You’ve seen it when you’ve gassed up your car, paid the grocery bill, or bought new furniture or a TV: things have gotten pricier.
Generations that missed the inflation run of the 1970s are getting an introduction in the COVID-19 era. Consumer prices rose last month over the previous September at an annualized rate of 5.4 percent. Along with similar spikes in June and July, this is the highest increase in price levels since 2008, the Labor Department says.
Food and energy prices famously yo-yo, but even excluding them, the annualized core inflation rate was an appreciable 4 percent. For context, the Federal Reserve’s policy is to hold annual inflation to 2 percent. The surge has experts fixed on the next Fed meeting November 3 for a policy response.
The equal and opposite reaction to spiking costs, for those of a certain maturity, is a corresponding cost-of-living adjustment to Social Security benefits. So 70 million Americans will see theirs go up almost 6 percent next year, the largest increase in four decades.
What’s causing the jump in prices, and how long will it pound our pocketbooks? BU Today asked Tarek Hassan, a College of Arts & Sciences associate professor of economics. He’s also a research fellow with the National Bureau of Economic Research, the nonprofit that makes the call on the official starts and ends of recessions, and a research affiliate with the progressive think tank Center for Economic & Policy Research.
Q&A
With Tarek Hassan
BU Today: What’s causing this inflation?
Tarek Hassan: COVID has made it a little harder to produce almost everything; this is why things are getting more expensive. Just think of what you do every day. You need to tell BU about your symptom status, sanitize your hands, put on a mask, and get tested weekly. The same issues exist in production plants around the world. They need to distance their workers, make sure people get vaccinated, and so on. All of that costs money and time.
In addition to that, many firms planned for a severe recession, taking machines and plants out of service, laying people off, etc. Now that demand is back and there was no large recession, firms are taking time to expand their capacity again.
BU Today: Is this likely a short-lived phenomenon, or are we entering a period of prolonged higher prices?
Tarek Hassan: I think it will probably take a year or two to work through everything, so my expectation is that inflation will come back down to more normal levels in 2023.
In the early days of the pandemic, there was a crunch in the supply chain for health care, supermarkets, and other consumer noncyclicals. You may remember it being hard to get toilet paper, for example. That worked itself out within a few months. Now the crunch has shifted to more complicated products, such as machines and long-lived consumer goods.
BU Today: What, if anything, can consumers do to protect their budgets against spiking prices?
Tarek Hassan: Inflation is not such a terrible thing, because it usually affects both prices and wages. So over time, wages will catch up to inflation, and they are rising strongly at the moment.
When it comes to your portfolio of investments, bank balances and bonds are more vulnerable to higher inflation than a mutual fund of stocks or real estate.
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