Economists have been waiting for Americans to shift from buying goods, like furniture and appliances, toward spending on vacations, restaurant meals and other services as the pandemic fades, betting the transition would take pressure off supply chains and help inflation to moderate.
Rapid wage growth could make that story more complicated. Demand for services is rising just as many employers are struggling to find workers, which could force them to continue raising wages. While positive for workers, that could keep overall inflation brisk as companies try to cover their labor costs, speeding up price increases for services even as they begin to moderate for goods.
Heavy spending on goods during the pandemic has been a driver of the recent inflation burst. Consumers began snapping up items a few months after pandemic lockdowns began and have kept on buying. Spending on services also has recovered, but much more slowly. That shift in what people are purchasing has roiled supply chains, which were not built to produce, ship and deliver so many cars, treadmills and washing machines.
Policymakers spent months betting that as the virus waned and consumers resumed more normal shopping patterns, prices of goods would slow their ascent or even fall. That would pull down inflation, which has been running at its fastest pace in 40 years.
But that transition — assuming it happens — may do less to cool inflation than many had hoped. A big chunk of what the government defines as “services” inflation comes from rental housing costs, which often move up alongside wage growth, as households can afford more and bid up the cost of a limited supply of housing units. And when it comes to discretionary services, like salons and gyms, labor is a major cost of production. Rising pay likely means higher prices.
Jason Furman, a Harvard economist who served as a top adviser to President Barack Obama, said the shortage of workers in many service industries means that if demand for services goes up, prices will too. That means a shift in spending back to services will not necessarily result in an overall slowdown in the pace of price increases.
“An awful lot of services are incredibly constrained,” he said. “As we shift back to services, we’ll get more services inflation and less goods inflation, and I don’t think it’s at all obvious that the result of that is less inflation.”
While America has gotten used to thinking about shortages in products — couches are out of stock, shoes are back-ordered — labor shortfalls could mean that services will also end up oversubscribed, allowing providers to charge more.
Some economists argue that if goods inflation slows, that could still help price gains overall to moderate, even amid rising wages. Prices for products that last a long time rose 11.6% in the year through January, and prices for shorter-lived products like cosmetics and clothing were up 7.2%, still much stronger than services inflation.
“We have in mind a big decline in goods prices,” said Roberto Perli, head of global policy research at the investment bank Piper Sandler. “It would take a lot of increase in service prices to actually offset that.”
Outright declines in goods prices are not guaranteed. Take cars: Rapid price growth in new and used autos was a big driver of inflation last year, and many economists expect those prices to dip in 2022. But Jonathan Smoke, chief economist at Cox Automotive, said continued shortages mean prices for new cars are likely to continue rising, and issues with new car supply could spill over to blunt the expected decline in used car costs.
And services inflation is now also coming in fast. It ran at 4.6% in the year through January, the quickest pace since 1989, and it has been posting large monthly gains since autumn. That is enough to keep inflation above the Federal Reserve’s 2% goal even if product prices stop accelerating.
While goods have taken up a bigger chunk of household budgets in recent months than they did before the pandemic, Americans still spend nearly twice as much on services as on goods overall.
“You don’t need a lot of extra services inflation to make up for your lost goods inflation,” Furman said.
Restaurants, hotels and other discretionary services are not the only places where persistent demand could run up against limited supply, Furman argued. Many nonurgent health care services saw a decline in demand during the pandemic and are now experiencing a rebound amid a shortage of nurses and other skilled workers.
Rent — which is the biggest monthly expense for many families and plays a big role in determining inflation overall — has also been rising at a rapid clip. In cities such as Tampa, Florida; Spokane, Washington;, and Knoxville, Tennessee, listed rents were up 30% or more in the fall from a year earlier, according to data from Apartment List.
Igor Popov, chief economist at Apartment List, said the breakneck pace of new rent increases is unlikely to repeat itself this year. But many rents will be resetting at higher market rates this spring and summer, he said, adding that they were likely to continue rising as long as wages did the same.
“Rents are partially a function of what people are able and willing to pay,” Popov said.
The Fed’s recent move to raise interest rates — and its planned increases throughout the year — may cool off the housing market, which could eventually affect rents. But in the near term, higher interest rates might make purchasing homes expensive and out of reach for more people. That could temporarily increase rental demand.
Much hinges on what happens next with wages, and that is anyone’s guess.
Laura Rosner-Warburton, an economist at MacroPolicy Perspectives, said wages might be going through something of a “level reset,” where companies have been paying up in light of a newly tight labor market — in some cases, to get on par with wages at Amazon or other big companies — but may not continue to lift pay so much month after month.
That may be what happened in accommodation and restaurants, she said, noting that both saw a surge in wage pressures that has since cooled off.
(Author: Jeanna Smialek and Ben Casselman)/(c.2021 The New York Times Company)
