‘Really out of control.’ America digs in for inflation fight.

Two days ago, Rebecca Dodson canceled her subscriptions to Netflix, Amazon Prime, and Weight Watchers. It’s the kind of belt-tightening that many Americans are beginning to contemplate in the wake of high inflation unseen for 40 years.

“The gas prices are really out of control,” says the Portland, Oregon, retiree and online tai chi instructor. “I’m still in sticker shock when I fill my gas tank.”

For Nancy Bisbee, the problem is housing. Crammed in a 700-square-foot one-bedroom apartment in the New York borough of Manhattan, she, her husband, and two young boys were eager to move to cheaper and larger quarters. In late 2020, they started looking in Connecticut, then New Jersey, and finally upstate New York. But offering $20,000 above asking price was getting the family nowhere, she says, because homes were getting snapped up at $50,000 above asking price.

So the homebuying plans are on hold, Ms. Bisbee says. “About three or four months ago, we just said we can’t afford this.” When she peeks at home prices these days, homes are selling at $100,000 above asking price. And the rise in mortgage rates has further dampened the family’s enthusiasm.

For Robert Johnson in Valparaiso, Indiana, the price shock is food (along with gasoline): “We noticed steaks were up to $15 a pound – New York strips. Last year about this time, you could get them on sale for $8 a pound,” he says.

Around the nation and indeed much of the world, resurgent inflation has proved more persistent than pretty much anyone had expected – most notably the Federal Reserve policymakers who a year ago labeled it a “transitory” issue.

Some recent polls show concern so high that it ranks as the top problem facing the nation, and the Fed is showing urgency of its own, with interest rate hikes designed to temper the consumer demand that has contributed to rising prices.

If all goes well, the policy shift coupled with Americans’ own economic resilience will be enough to weather the storm and see it begin to diminish in the months ahead. The challenge is that this round of inflation is unlike any other, so traditional assumptions about how inflation plays out may not apply.

“Outside of wartime history ... it’s just a very unusual circumstance” for the West, says James Stock, a Harvard economics professor and member of the Council of Economic Advisers during the Obama administration. 

A garden-variety inflationary spurt might be fueled by a shortage of food or energy. But this time, these shortages have been preceded by a two-year procession of rolling shortages – everything from toilet paper and sanitizer to computer chips and lumber to baby formula and now tampons – brought on by a once-in-a-century pandemic. Economists call such huge and unanticipated shocks “black swans.”

One black swan, such as the 2009 collapse of the subprime mortgage market, can sometimes trigger a panic and a huge recession. The appearance of two black swans – the pandemic and then the unexpected Russian invasion of Ukraine – makes the current period almost impossible to predict.

For example: Will the current set of shocks last a few months, like the toilet paper shortage? Or will it last years, like semiconductors? That debate is raging right now as economists try to figure out whether the challenge is mostly a supply or a demand problem. The answer may well offer clues to how quickly inflation subsides.

“People felt much wealthier”

Inflation is the result of a mismatch between supply and demand: too many people chasing too few goods. The conventional wisdom is that the current round of price rises started because supply chains were hit hard by the pandemic. COVID-19 lockdowns temporarily closed factories and made it difficult for suppliers to catch up, especially if, say, a fire or other disaster caused further glitches. The other explanation is that the pandemic caused demand to go up. Stuck at home, workers who no longer spent money on commuting or eating out suddenly had money to spend on home offices. Unprecedented rounds of federal stimulus payments to households didn’t hurt, either. 

“People felt much wealthier,” says Diego Comin, an economics professor at Dartmouth College. “We wanted to buy ovens and fridges and stuff at Home Depot to make our houses look better.”

This unprecedented shift away from spending on services toward spending on goods was the main driver of the resulting inflation, he argues, with supply constraints exaggerating the effect. 

If limited supply is the main driver, the adjustment will depend on how quickly companies can boost production. This proved relatively quick for the makers of toilet paper and cleaning products. It’s taking much longer for computer chips because semiconductor plants require huge investments and long lead times.

If instead the main problem is demand, then the adjustment could be quicker. For some consumers, it’s already underway.

Riding an hour to lower-priced shops

“I just have to be more intentional about how I spend my money,” says Gabriel Costa in Ayer, Massachusetts, where he works part time in child care while attending community college. “Gas has been the most stark contrast. ... I live in an area where I have to drive relatively far for most of my needs. So that’s just kind of a consistent concern.”

Rather than buy food in her Boston neighborhood, Nayelly Rodríguez, a college student from the Dominican Republic, travels an hour by subway to her grandmother’s neighborhood, where the prices are cheaper. And “this is where I buy all the big [nongrocery] stuff, and then I bring it back here,” she says.

Nationally, some signs suggest that supply and demand are starting to come back into balance. Walmart and Target last month reported they now had too much inventory on hand (although key parts for manufacturers, such as car parts and computer chips, remain in short supply). Employment postings and other data suggest the labor market is hot but no longer red-hot. 

None of this suggests the transition will be easy. Nearly 7 in 10 economists expect a recession within the next 18 months and nearly that many CEOs agree, at least for their region, according to surveys in the past few days. The stock market has fallen more than 20%, a bear market that often signals a coming downturn. More than half of Americans believe the United States is already in a recession, according to a poll by The Economist and YouGov published Monday.

Harder to do business

Entrepreneurs and small-business owners are already feeling the pinch.

“I’ve noticed spending more on grocery stores or especially restaurants, and so for me, the only way to accommodate that is to bump up my own rates,” says Max Goldner, a graduate student in Brooklyn, New York, who relies on freelance tutoring for income. He’s been tutoring kids in cello and Hebrew for years and never raised his rates. “Inflation is the thing that’s making me have to be a businessperson at the end of the day.”

Wholesalers have raised their prices so much that Agyeman Manu-Dapaah, owner of a West African restaurant in Florissant, Missouri, is struggling to keep his regular customers. “A pound of goat used to go for $4. Today it’s $9, and yet customers expect the same prices,” he says.

He tried reducing portion sizes but got negative online reviews from customers. “So we had to go back to the [original] portion sizes that they were used to and increase the prices,” he says. While that’s also riling customers, it’s the only way Mr. Manu-Dapaah says his House of Jollof can stay afloat. 

An eye on expectations

Quickly tamping down the public’s inflationary expectations is key to ending the price spirals.

“The biggest risk is not from these temporary price increases, but from these temporary price increases becoming permanent, because of them being built into expectations and contracts,” says Mr. Stock of Harvard. “And that’s why the Fed’s quick aggressive reaction is so important.”

On Wednesday, the Federal Reserve hiked interest rates by three-quarters of a percentage point, affecting everything from savings accounts to mortgage rates. The last time it made a hike so big was 1994. 

If Ms. Bisbee had any remaining hopes of snagging a home within driving distance of New York, the rise in mortgage rates quashed them. 

“We’re frustrated,” she says. Graduating from college just after the Great Recession, she needed years to find a full-time job. Now, she and her generation are looking to buy a home just as their parents did, but the skyrocketing costs are forbidding. “I feel I have the worst timing,” she says.

It’s a feeling Mr. Johnson in Valparaiso knows well. He graduated at the end of back-to-back recessions in the early 1980s, and it took him six years to find year-round employment. He’d grab seasonal work and rake leaves. He even delivered flowers for his brother-in-law’s funeral home in exchange for gas. For food, he’d buy hot dogs and baked beans in bulk when they were on sale, eating the beans from the can at lunchtime and the hot dogs at night. Yet time and again, money and opportunities arrived just in time, and he eventually landed a well-paid job as an engineer at Amtrak.

“I would say to any young person, ‘Don’t get bogged down in what you’re seeing,’” he says. “If we had gotten bogged down in worrying and fretting, we would never have seen the blessings we saw.”

Three years ago, he and his wife retired. Chicken and vegetables long ago replaced hot dogs and beans at mealtime.

Monitor staff writers Chris Ajuoga, Luke Cregan, Aubrey Hawke, and Rhyan du Peloux contributed to this story. 

Editors note: This story was revised to correct Mr. Johnson's first name and his relationship to the funeral director.