Pa. experts discuss causes of inflation, when prices might go back down

Pennsylvania

AP Photo/Frank Franklin II, File

PENNSYLVANIA, (WHTM) — After a period of recession sparked by the COVID-19 pandemic, prices have been rising for several months. The Associated Press reported that inflation in June marked the fourth straight month of price increases.

Yeva Nersisyan, associate professor of economics at Franklin & Marshall College, said that the inflation Americans are seeing now was not a surprise for economists.

“When you’re looking at inflation, you’re comparing what happened this year to what was going on last year, and given last year’s low baseline, it’s expected to see some kind of price pressures,” Nersisyan said. Consumer prices in June were up 5.4% from the previous year, which was the largest increase in 13 years, the AP reported.

Finance and economics experts say the unleashing of pent-up demand combined with stimulus money distributed to mitigate the economic impacts of the pandemic are two major factors contributing to high prices.

Hotel prices, airline fares, and restaurant prices were all up in June, abc27’s James Crummel reported. “You’re really just seeing the unleashing of pent-up demand [after] people have been stuck at home for a long period of time,” Dan Eye, head of asset allocation and equity research at Fort Pitt Capital Group, said.

As businesses reopened and travel returned after pandemic shutdowns, production challenges and supply chain bottlenecks meant that businesses didn’t always have the product available to meet consumers’ demand, further contributing to rising prices.

“As the economy started to reopen, you had literally millions if not billions of dollars in the economy, so people had lots of money, companies had lots of money, because we gave them the money as a country because we thought the pandemic was going to be really terrible in terms of the economic loss,” Tom Jordan, market president for Central Pennsylvania at Univest Bank and Trust Co., said.

Nersisyan agrees that government stimulus programs contributed to current higher prices, although she noted that the stimulus money likely prevented worse economic outcomes such as a deeper recession.

“The economic loss probably didn’t happen as badly [as was expected], so people that got money had a lot of it, they had demand because they’ve been pent up for 18 months…so all of a sudden, the demand surges back, but the production can’t keep up with the demand,” Jordan said.

A computer chip shortage combined with high demand for automobiles has caused vehicle prices to skyrocket, for example. Used cars and trucks cost 10.5% more in June than they did the month before — the largest monthly increase on record, Crummel reported.

Jordan explained that businesses, especially manufacturing businesses, that relied on wood, steel, and petroleum have been hit especially hard by supply chain issues. Supply shortages plus heightened consumer demand equals rising prices.

Further complicating the situation is the globalized element of the economy. “Our economy is not just the U.S. We’re depending on all these countries throughout the world who were experiencing COVID recovery at different paces,” Jordan said.

Businesses have to adjust their prices for rising costs of raw materials, or they may start losing money, Jordan said. “If they’re not watching their costs and managing their businesses well, they can be selling things…at a price that is not high enough to meet the cost that they actually have in the product,” he said, noting, “It’s compounded with smaller businesses.”

Larger businesses have people who closely monitor and analyze things like material costs and profits, while small businesses might not have that resource. “That’s where I think inflation is going to bite a lot of the smaller businesses harder than what they may expect,” Jordan said.

On the consumer side, lower-income households likely feel the effects of inflation more than higher-income households. “I think that the people at the lower end of the wage scale are more hurt by inflation because those purchases at the grocery store, the things that they have to do to live, to eat, to pay rent makes up a larger portion of their budget,” Eye said.

In April, Crummel reported that grocery prices had increased 3.5% over the past year. As of late June, meat prices had risen especially high, although other food products like fresh vegetables, ice cream, and even bread have seen price hikes since the pandemic.

When will inflation get back to normal?

Federal Reserve Chair Jerome Powell has stated that these price increases will be transitory. So when will prices and inflation get back to normal, if ever?

No one has a crystal ball to know exactly what will happen, but Jordan doesn’t think prices will go back down to where they were before the pandemic. “What I think will happen is I think inflation will moderate, but we will not come back down to the same level pre-pandemic,” he said.

Eye agrees, hypothesizing that inflation levels will remain higher for the next few years than they had been for the previous decade or so. He said that price increases caused by supply chain bottlenecks (like with automobiles) or a more temporary spike in demand (hotels, air travel) will likely fade more quickly as those supply-side issues are resolved.

“But I do think some of it’s stickier and it’s going to be with here with us for some time, like the housing price pressure really being driven by low interest rates and kind of a mismatch between high demand and low inventory,” Eye said.

This pandemic period of recession/inflation is fairly unique, Nersisyan explained. The country clearly experienced a recessionary period at the beginning of the pandemic, she said, but although the economy has reopened and prices are on the rise, economists have not determined whether the country has officially entered a recovery period yet.

The unemployment rate is still high, Nersisyan said, which would be bad in other situations, but the pandemic and other related factors complicate normal metrics. Globalized supply-side challenges, the possibility of future shutdowns or major COVID-19 outbreaks, and the proactive steps the government took to prevent a major recession have made the current situation unique, she said.

These experts also predict that demand will drop as people run out of the stimulus money they received during the pandemic, which will contribute to the current inflation diminishing.

Jordan encourages individuals who are able to hold off on purchasing items like cars or houses until prices have dropped a bit. “If you can wait, I think you’re going to see prices — they’re not going to plummet, but they’re going to kind of moderate back down,” Jordan said.

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