'I really had sticker shock': Will a reopening economy mean surging prices for Americans?

Consumer prices have risen more sharply recently.

Deborah Widger of Queens, New York, normally rents a car to drive to the Philadelphia area to visit her parents several times over the summer.

But she says rental car prices are up 20% to 30% since her last visit and a three-day weekend rental would cost $500.  

“I’ll take Amtrak,” says Widger, a retail consultant who lost her clients because of the pandemic and lives on enhanced unemployment benefits.

Consumer prices jumped 4.2% annually in April, the most in 13 years, sparking this question: Is it a blip or a harrowing return to the 1970s?

It isn’t just the usual culprit: gasoline. Pump prices have soared 50% from a year ago, but a core inflation reading that strips out volatile energy and food items increased 3% annually, the largest advance in 25 years.

Surging prices for used cars, airfares

Some of the price increases were eye-popping, particularly in an economy that has struggled for years to approach the Federal Reserve’s 2% annual inflation target. From March to April, used car prices climbed 10%; airline fares, 10.2%; hotel rates, 7.6%; car rental prices, 16.2%; admission to sporting events, 10.1%; household furnishings, nearly a percentage point; and car insurance, 2.5%.

Again, these are monthly increases.

“This is remarkable,” says Ian Shepherdson, chief economist of Pantheon Macroeconomics.

Could interest rates rise again?

The outsize surge is raising questions about Fed Chair Jerome Powell’s belief that the COVID-19-induced price spike is temporary. That outcome would probably keep the central bank’s key interest near zero until 2024, at the earliest.

A more enduring bout of inflation could spook consumers and force the Fed to hike rates sooner, pushing up mortgage rates, among other borrowing costs, and crimping the recovery from the coronavirus recession.

Many economists side with Powell, arguing the leap in prices is a byproduct of a reopening economy and should abate by next year. That contingent notes that consumer and business inflation expectations – a critical factor that determines how rapidly prices rise – remain stable.

“The economy should go back to a footing that’s more normal” by this year or 2022, says Bill Adams, senior economist at PNC Financial Services Group.

Others say the rise in prices could last longer.

“Given the breadth of the upward pressure on both prices and wages, we believe this will develop into a sustained wage-price spiral,” economist Paul Ashworth of Capital Economics wrote in a note to clients last week.

Eighty-three percent of Americans are somewhat or very concerned about the  acceleration in prices, according to a Harris Poll survey for USA TODAY conducted April 30-May 2. Sixty-four percent of respondents say they’re finding higher prices for food and groceries; 61%, for gasoline; 46%, for restaurant meals; 43%, for personal care items; and 38%, for household appliances.

Widger, a baby boomer, is feeling the higher inflation in more than rental car costs. She ventured back to Target and found prices for sandals and other basic shoes had risen 20%, and baseball caps cost $15, up from $10. Instead of plunking down her usual $60 to $100, she spent $37.

“I haven’t been in a store in 15 months,” she says. “I really had sticker shock.”

Here’s why prices have risen so sharply and why many economists say the episode will soon fade.

The big plunge

Prices tumbled last spring as the pandemic led states to shut down their economies. That’s boosting yearly inflation because today’s prices appear lofty compared with a much lower base. That effect won’t be as pronounced by fall since energy and other commodity prices began rising by the second half of last year, Adams says.

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Reopening economy

As more Americans are vaccinated, states are lifting restrictions. The U.S. economy is likely to be fully open by summer. People are eager to travel, Ashworth says, as they “finally get to use their saved vacation days and try to make up for lost time,” pushing up airline fares, hotel rates and car rental prices.

The burst of activity will last only so long, Adams says, causing price increases to moderate. The cost of goods and services unrelated to the reopening – such as rent, medical care, clothing and groceries – increased more modestly last month, Ashworth and Shepherdson note.

Stimulus money

Americans’ pent-up demand for fun things to do has been juiced by lots of savings. Most people received three rounds of government stimulus checks totaling $3,200. They’ve socked away cash by limiting their traveling, dining out and other activities over the past year. Households have amassed a total $2.4 trillion in excess savings during the pandemic, according to Regions Financial.

That should lift spending – at least for the majority of people who still have jobs – and nudge prices even higher this year. But it should be a fleeting bump since there probably won’t be another wave of government checks next year, Adams says.

Supply chain disruptions

The global economy, including the USA, is beset by snarls in the production and delivery of goods ranging from cars and appliances to coffee and smartphones. Customer demand has bounced back even while factories, ports and warehouses remain understaffed because of COVID-19-related illness, child care duties or social distancing mandates. Shipping containers are stacked high at ports. A computer chip shortage has especially hampered auto production.

It’s all driving up freight costs and consumer prices.

Many economists expect the bottlenecks to ease this year. As vaccinations increase, staffing at factories and warehouses can return to normal. Shipping should improve the rest of this year, reducing prices for commodities such as lumber, steel, copper and chemicals, according to IHS Markit.

Worker shortages

Restaurants, hotels and myriad other businesses are struggling to find workers as customer demand surges, even amid a historically high 6.1% unemployment rate. Companies say many unemployed people prefer to receive enhanced jobless benefits that, in some cases, top their previous wages. Other Americans are hesitant to look for a job during the health crisis or are caring for sick relatives or children who are distance-learning at home. About 4 million people have dropped out of the labor force.

The labor shortages have started to push up wages and benefits. Total compensation for U.S. workers rose 0.9% in the first quarter, the largest gain in more than 13 years. The higher pay could spur employers to raise prices to maintain profit margins. 

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The jobless benefits are set to expire by September, Adams says. As vaccinations increase and schools reopen, more people will go back to work, easing wage pressures.

Inflation expectations

The biggest reason strong inflation is unlikely to persist is that the public expects price increases to remain modest over the long term, says Joseph LaVorgna, chief economist of the Americas for research firm Natixis. That’s largely because of forces such as discounted online shopping and the more globally connected economy, which have held down inflation for many years.

Otherwise, higher prices would prompt consumers to ask for bigger raises, and bigger raises would lead businesses to raise prices, setting off a wage-price spiral.

What if it's not so temporary?

Some economists lay out alternative scenarios that could send wages and prices higher over a longer period.

Supply chain tie-ups, for example, could last into next year. “Given how widespread these global shortages have become, we would be very surprised if they fade within a matter of a few months,” Ashworth says.

Barclays says slower vaccinations overseas could keep the disruptions “in place longer than expected.”

Prices for services such as airplane trips and hotel stays are still below their pre-pandemic level, but a surge in pent-up demand could push them higher, Ashworth says. Oxford Economics expects consumers to spend 13% of their $2.4 trillion in excess savings next year.

Although many people are likely to come back to the labor force, Ashworth says, about half of those who left have retired, possibly limiting the extent to which returning workers will hold down pay increases.

Measures of inflation expectations – in certain bond prices and surveys – have increased in recent months, Ashworth says. “We wouldn’t be surprised to see a further rise as actual inflation surges,” he says. "The Fed would be foolish to put too much faith in expectations being well anchored." 

Most people surveyed by Harris say they noticed the higher prices largely in groceries and gasoline, though Labor’s consumer price index showed a modest rise for food-at-home costs the past year. Although gasoline prices are up 50% annually, they fell slightly last month.

Melanie Whitfield, 46, of Orlando, Florida, says she’s been spending $200 at the grocery store every two weeks for her and her husband, up from $150 a month or two ago.

“It’s absolutely costing me more, and my income is not going up nearly as much,” she says. She buys cheaper generic and frozen foods to save.

Kay Fuhler, 62, of Toney, Alabama, says pump prices have risen from about $2 a gallon to $2.89 in recent months, and she shells out about $40 to fill up her Chevy Colorado pickup, up from about $30. Instead of driving to South Florida for her summer vacation, she plans to head to East Tennessee. She shelved plans to buy new outdoor furniture.

Asked if higher inflation is a concern, she says, “It is if it continues.”