The U.S. added 379,000 robust jobs in February and the economy is poised to start, but improved growth prospects could come at a short-term cost.
In a word, inflation.
Make no mistake, inflation is still very low and has been for the last decade. The coronavirus pandemic raised inflation early last year and even now prices are rising by less than 2% a year.
Read: Concerns about inflation have returned. Should you worry?
The loss of so many jobs during the pandemic (almost 10 million are still missing) and the consequent fall in demand also help prevent inflation.
“It is difficult, if not impossible, to generate sustained inflation and higher inflation expectations when the economy is still so far from full employment,” said Scott Anderson, chief economist at the Bank of the West.
See: A visual look at how an unfair pandemic has transformed work and home
That could change in the coming months. How is that? Rising oil prices. Shortage of raw materials and other key supplies, such as wood and semiconductors. And another round of massive government financial aid to Americans.
After falling to almost zero last May, the annual rise in the consumer price index rose to 1.4% in January, and is expected to continue to rise. The CPI is the government’s main tool for tracking the cost of living and determining how much to increase Social Security benefits each year, among other things.
Economists predict that the CPI will rise 0.3% in February, raising the annual rate to 1.7%. The report, which will be published next Wednesday, is the highlight of the week on a light economic calendar.
See: MarketWatch Economic Calendar
In the summer, many economists estimate that the cost of living will rise by more than 2% a year and exceed the Federal Reserve’s 2% target.
Evidence of rising prices is rising. A couple of ISM purchasing managers ’reports last week, for example, showed that companies were paying much higher prices for a wide range of supplies they need to produce goods and services.
A barometer of business supplies prices rose to a ten-year high, prompting a wholesale executive to worry about “the continued influx of price increases due to commodity shortages , labor shortages and transport delays “.
Then there are oil prices. The cost of oil has risen 25% since early January after Saudi Arabia and other non-US suppliers cut production. This also fuels higher prices.
Throwing fuel into the fire costs nearly $ 2 trillion in new Washington financial aid, just as the economy seems to be accelerating. Congress and the White House, led by Democrats, are expected to approve the bill in a matter of days.
The result is that inflation is likely to rise in the coming months. The big question is: will it be just a temporary phenomenon linked to a total reopening or to the economy? Or something worse that persists?
Fed Chairman Jerome Powell and most senior central bankers are betting the price hikes won’t last. Powell has repeatedly predicted that the expected inflation boom will be exhausted and pose no threat to the economy.
The danger, some economists warn, is that a rise in inflation will create more uncertainty among investors, raise interest rates and affect the economic recovery.
Home sales, car sales and many other commercial and consumer activities have greatly benefited minimum interest rates. And that’s not to mention the record stock market gains that some Fed critics link to the central bank’s easy money strategy.
Even if Powell is right, rising inflation is likely to complicate the path to a U.S. economic recovery if investors continue to have doubts.
“Powell is ready to let inflation soar, and is unlikely to act in the face of that unless it gets out of control,” ING economists James Knightley and Padhraic Garvey said in a note to clients. “The problem is we won’t know if it’s controlled or out of control until we let it boot up a bit.”