After a long lull, inflation rises from gas-pumps to retail stores

Behind a wall of stainless steel refrigerators, next to the fancy ranges, nearly 50 washers and dryers are displayed for sale at Warrendale Appliance in suburban Boston. Sales are brisk. And while prices on foreign-made washers have bumped up a bit because of a new tariff, management isn’t worried.

“It’s fifty bucks a washer,” says the owner, who did not want his name published. “It doesn’t affect business.”

But in downtown Boston, the problem for John Sadowski is that prices have been rising even more sharply for longer. Labor and other construction costs are up so much over the past three years that it's getting harder to make the numbers work on development projects. “At some point, something’s got to give,” says the commercial real estate consultant with Colliers International Group. 

From real estate to gasoline, Amazon to Whirlpool, prices are on the rise. For some industries, such as construction, they’ve been rising for several years, long enough to become worrisome. For others, price hikes are just beginning.

That means inflation – after more than a decade of hibernation – appears to be reemerging as a broad and notable force in the economy.

Economists don’t see inflation upending consumer confidence, in part because incomes are also generally rising. But it does mean subtle shifts, from drivers watching pump prices more carefully to families thinking about whether that extra meal out fits in the budget.  

It also means rising interest rates, boosting the cost of everything from credit-card debt to a home or car loan. A key reason: As inflation has shown signs of a pickup, financial markets are anticipating tighter monetary policy from the Federal Reserve.

All this can be viewed as a sign of an economy that’s healthy and actually normalizing after years in post-recession recovery mode. But it also signals an important transition – toward a phase of the economic cycle where the Federal Reserve faces difficult choices about how to contain inflationary pressures without choking off growth.

“It’s really been a long time coming,” says James Bohnaker, an economist at IHS Markit in Cambridge, Mass. “Over the past five years almost, people have really been anticipating inflation to start picking up sooner than it has.”

Attitude change at the Fed

Now, with newly enacted tax cuts and federal spending boosting an economy where local job markets are often already tight, Mr. Bohnaker says mind-sets at the Federal Reserve’s policy committee have changed.

“More members are focused on fighting inflation rather than being concerned [how to stimulate growth], which is a pretty momentous shift,” he says.

It’s not that inflation is running out-of-control. But to the degree that price hikes become a persistent trend, the Fed and bond investors will respond by pushing up interest rates – slowing economic growth and at some point heightening the risk of a new recession.

Already, many economists expect the Fed to boost short-term interest rates four times this year, totaling a full percentage point of increase.

Costlier summer travel

The most obvious example of rising prices is at the service station. A gallon of regular now costs an average $2.81 per gallon, nearly 50 cents a gallon higher than a year ago, and will rise up to another 10 cents this month, according to the AAA motor club based in Heathrow, Fla. It predicts this summer will be the most expensive driving season in four years.

The rise in fuel prices, if it sticks, will likely mean higher airfares, American Airlines CEO Doug Parker told analysts and reporters last week. The world’s largest airline said higher jet-fuel prices caused a 45 percent decline in its first-quarter earnings.

Freight rates have also jumped – and not just because of higher diesel prices. A shortage of truckers has boosted average pay for independent drivers 15 percent since 2013, according to March survey by the American Trucking Associations. Private fleet drivers have seen an 18 percent rise from $73,000 to $86,000 a year on average.

Higher shipping and fuel prices are beginning to worm their way through the economy, causing other price hikes. General Mills, maker of Cheerios and Häagen-Dazs ice cream, has said it’s raising prices on cereal and snacks. In February, Tyson Foods told analysts it would raise prices because the trucker shortage was costing the food company an extra $200 million a year.

Prices for online services are also on the rise. In the Boston region, a data-storage firm increased prices on individuals by as much as 20 percent, the Federal Reserve noted two weeks ago in its “beige book” report of business conditions around the country.

Amazon is boosting the price of its popular Prime service by $20, to $119 a year, starting in mid-June (and on May 11 for new members).

Prices up, but so are wages

Businesses are typically reluctant to raise prices because they fear losing customers. But when Netflix boosted prices last October by $1 a month for its popular $9.99 plan and $2 a month for its $11.99 premium plan, it added 2 million more subscribers than it had expected.

For now, in fact, the economic news remains largely positive. Jobs are available, and pay is rising.

“I do think that we are going to see incomes rising more quickly than inflation,” says Gus Faucher, chief economist at PNC Financial Services Group in Pittsburgh. “I am very doubtful that we’ll see inflation well above the Fed’s 2 percent goal on a consistent basis.”

That’s because he sees excess production capacity in the global economy, as well as a willingness at the Fed to raise interest rates as needed. Mr. Faucher expects the current expansion to continue through the middle of next year, becoming the longest in US history.

“After that it gets a little dicier,” as the stimulative effect of recent tax cuts fades, he says.

Various forces are pushing up prices. There are labor shortages, such as for truckers, as firms compete to lure them with better pay. Labor supply is also an issue for construction-related firms like Colliers (a firm that's involved in renovation work for the Monitor’s publisher, The First Church of Christ, Scientist). 

There are commodity shortages, such as for oil, because OPEC has reduced oil production to boost prices. Another driver is public policy, such as tariffs on trade. In the wake of trade restrictions on foreign washing machines, even domestic manufacturers like Whirlpool have announced price hikes.

Trump administration sanctions on foreign steel have also caused sometimes sharp surges in steel prices, according to the Fed’s latest beige book analysis. “Businesses generally anticipate further price increases in the months ahead, particularly for steel and building materials.”