Folks, I almost spilled my coffee reading this one. The worst of America’s inflation resurgence may be over, but that doesn’t mean the inflation resurgence is over – prices could keep rising uncomfortably for years. I mean, who doesn’t love paying more for the same old stuff? On Tuesday, the Bureau of Labor Statistics is expected to report that consumer prices fell in June from the previous month, which would be the first time in two years that prices dropped month-over-month – and only the third time since the pandemic. Wow, what a milestone.
The decline in prices is mostly due to gas and oil prices falling by an extraordinary amount last month after President Donald Trump signed a Memorandum of Understanding with Iran. But, of course, that agreement is now “over,” and oil prices are rebounding slightly again. Because, why not? It’s not like we can expect any stability in the world of politics.
But stripping away volatile oil prices, the inflation picture isn’t looking quite so rosy. Economists expect that the tumbling fuel costs caused overall prices to fall 0.2% in June from the month before, FactSet estimates show. They’re expecting the annual rate of inflation to ease as well, slowing to 3.8% from 4.2%. That’s still pretty high, if you ask me. Consumers tend to notice price hikes when they average more than 2% – a Federal Reserve target that new Chairman Kevin Warsh noted the central bank has failed to hit for five years. Bless their hearts.
The increase in energy prices from February through May, and the businesses that took on those extra costs, those are still in the system, said Claudia Sahm, chief economist at New Century Advisors. They’re showing up in other types of goods prices or services prices. Those effects take time to work their way to consumers, she added, but the closely watched “core” inflation gauge, which strips out energy and food costs, could provide a rough view of how those price hikes are seeping through.
Inflation gets particularly sticky when prices for services rise – think haircuts, trips to the doctor or the vet, that recent oil change or car repair. Those prices tend not to go on sale, and they also move in one direction: up. When was the last time your gym membership fell? I rest my case. Disinflation (when the pace of price hikes cools) is typically more sluggish in service businesses because their biggest expense is labor. Unlike goods prices, which are more dynamic and can rise and fall based on supply and demand, wages tend not to be adjusted downward.
The United States is dealing with what economists call “sticky” inflation, and it’s a problem because the United States is a services-based economy. Just under three-quarters of the US economy is made up of service businesses, according to the St. Louis Federal Reserve. There is good news on the services front: Housing, which accounts for the largest share of the Consumer Price Index, has been on a slow (very slow) but steady disinflationary path for the past three years. Housing-related inflation is now running at a rate last seen around 2016 to 2019.
The not-so-good news: Core services inflation outside of housing has been strikingly stubborn and even picked up speed in the first part of this year. And economists are growing concerned that the next bout of inflation may come on top of the preexisting price increases. You can’t make this stuff up, folks. The massive push to lay the groundwork for the artificial intelligence revolution is expensive. Really expensive. Tech companies are expected to spend more next year on AI than the United States spends on its military, according to Morgan Stanley.
Data-center buildouts have already raised electricity prices, up nearly 6% over the past year. And memory and storage chip prices are surging as data centers gobble them up: Apple recently announced it would raise its iPad and Mac prices because of the skyrocketing price of memory chips. Each 10% increase in AI-related hardware costs would raise consumer inflation around 0.1%, according to Abiel Reinhart, senior economist at JPMorgan. Adding AI features in business applications will also raise the price of software.
The war with Iran has also disrupted global supply chains, which will feed into consumer inflation, new Atlanta Fed research shows. As it stands, Americans are paying basically a third more for most goods and services than they did before the pandemic. “It’s going to take a few years of low inflation for consumers to feel like things are kind of back to normal,” said Gus Faucher, chief economist at The PNC Financial Services Group. “It’s going to be a long, drawn-out process before people are starting to feel good about things again.”
In conclusion, folks, it seems like we’re in for a long haul of rising prices and uncomfortable inflation. But hey, at least we can take comfort in the fact that our gym memberships will never go down, right? 🙄 It’s going to be a wild ride, and I’m just glad I have my coffee to get me through it.
Armchair patriot. Believes in the free market, cold beer, and that there’s always a guy named George behind every CNN segment.
Former remote-throwing champion turned #1 couch commentator on liberal panic in the media. Born in Texas (or so his mug says), he earned a degree in Fake Newsology & Beer Philosophy from YouTube University.
