To us, it has long seemed only a matter of time. Eventually, there would be moderate increases in U.S. inflation. Measures to fight the pandemic initially suppressed both supply and demand. But the supply side tends to be more rigid as it takes time to rebuild capacity. Meanwhile, generous fiscal transfers have kept household spending power afloat. So, as economic-activity restrictions are lifted somewhat, higher aggregate demand in turn faces less supply. At least temporarily, that would contribute to prices rising, starting, perhaps, with goods that offer "happiness" in times of social distancing.
As we show in our "Chart of the Week", the recent Personal Consumption Expenditures (PCE) Price Index for August provides some evidence that supports the above scenario. For the first time in 25 years, durable consumer-goods prices turned positive, having previously sunk deep into disinflationary territory. Prices for household appliances (gained 10% since February 2020) and used motor vehicles (gained 17%) were the main drivers.
The pandemic seems like a plausible culprit. When people try to avoid using public transport, used cars seem to be an obvious substitute (e.g. having lost their job, leasing a new car might not be an option.) Meanwhile, historically low mortgage interest rates in the wake of looser monetary policies continue to boost housing markets. New homes tend to generate follow-up purchases. When it comes to imported goods, another factor behind the upward pricing pressures might be shortages in sea-freight capacity because of the pandemic.
Of course, these trends could easily reverse. As Christian Scherrmann, U.S. economist at DWS, suggests: "The recent increase in durable consumer prices might well prove transitory but it serves as an example of how quickly inflation can react to fast changing circumstances." Not to overstate matters, durable consumer goods still only account for roughly 12% of overall spending, compared to 66% on services. That said, services prices already trended somewhat above 2% for the past years. Once the fight against the virus is won, the odds are that services will likely face capacity shortages too.
Sources: Bureau of Economic Analysis of the United States Department of Commerce, DWS Investment GmbH as of 8/31/20
1. See some comments from the wholesale industry in the latest report on the current situation by the Institute of Supply Management (ISM), published by the ISM along-side its better known monthly purchasing manager index: https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/september/
2. Bureau of Economic Analysis of the United States Department of Commerce, Haver Analytics Inc. as of August 2020
3. On average since 2012