Two months of sharply rising prices have raised concerns that large government financial rescue packages and the Federal Reserve's ultra-low interest rate policies are fueling higher inflation.
Two months of sharply rising prices have raised concerns that record-high government financial aid and the Federal Reserve's ultra-low interest rate policies — when the economy is already surging — have elevated the risk of accelerating inflation.
In May, consumer prices rose 5% from a year earlier, the largest such year-over-year jump since 2008.
Many economists see the recent spike as temporary. Others say they worry that higher consumer prices will persist. Jason Furman, a Harvard professor who was President Barack Obama's top economic adviser, thinks the reality is more complicated. He does, however, lean toward the higher-inflation-will-persist camp.
Furman notes that while most economists expect inflation to slow from its current quickened pace, not all think it will fall back to the Fed's preferred level of 2% a year.
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The Associated Press spoke recently with Furman about why higher inflation might prove only temporary, why it might persist and whether a little more inflation is all that bad.
The interview was edited for length and clarity.
6 questions answered about the risks of rising prices
What's driving inflation up?
Q. WHAT'S DRIVING INFLATION UP, AND DO YOU THINK IT WILL PERSIST?
A. There's been a lot of very temporary inflation from a set of quirks related to the economy's reopening. For example, used car prices have absolutely soared, and other prices are getting back to where they were pre-pandemic. I don't think anyone thinks the recent rate of price increase is going to continue. The question is, how much does it slow down? Does it slow down all the way back to the 2% increase every year we used to see? Or does it slow down less than that, and we're left with something more like a 3% increase every year?
How bad would it be if inflation hits 3%?
Q. HOW BAD WOULD 3% INFLATION BE? IS IT SOMETHING WE REALLY NEED TO AVOID?
A. I don’t actually think 3% inflation would be terrible, but it depends. If policymakers tried to lower inflation from 3% to 2%, (by raising interest rates), that could be pretty painful. If wages don’t keep up with prices, that would also be troubling. But if we want to operate the economy, year in and year out, at a higher inflation rate going forward, I don’t see that as a problem. But I do think it’s important to make policy based on the most realistic and accurate expectations for what’s happening in the future.
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What might keep driving prices higher?
Q. BEYOND THE ECONOMY'S REOPENING, WHAT MIGHT DRIVE A MORE SUSTAINED BOUT OF INFLATION?
A. I think the four reasons why you might worry that inflation is going to be more persistent are, No. 1, there are some shoes that haven’t dropped yet. The biggest of them being the price of shelter — that’s rent. And then it's something called owner's equivalent rent, which is what it costs a homeowner to live in their home. (Both rents and home prices have risen sharply.)
Second factor is some prices are sticky. That means they don’t adjust really quickly and right away. A lot of prices change once a year, and you’re going to see more of those price changes over time. Wages also tend to be sticky. A lot of employers might in September decide on new wages for January.
The third factor is that it’s likely that demand continues to exceed supply through the rest of the year. People have a lot of money. They’re spending that money, but not everyone’s back to work, which means we can’t make everything that people want to buy.
And finally, and most speculatively, expectations for inflation play a big role in the dynamics of inflation. Could expectations change? Could they become unanchored if people start to expect more inflation? It would be self-fulfilling.
How bad can it get?
Q. HOW DOES THE CURRENT SITUATION COMPARE WITH THE SPIRALING INFLATION OF THE 1970s?
A. There’s no danger of a repeat of the experience like the 1970s. The Fed learned that lesson. They’ll never let inflation get to 10%. The 1960s is the model for what we’re going through now. Inflation crept up from about 1.5% to about 5%.
One of the troubling things in the 1960s was that wages didn’t keep up with prices, and so people saw their purchasing power, their real wages fall. I’m not saying that’s what’s going to happen now, but that is the scenario to be worried about.
Do financial leaders have a handle on the problem?
Q. DO YOU THINK THE FED HAS PROPERLY ASSESSED THE RISKS?
A. They shifted policy in the right direction at their latest meeting (on June 15-16). But I think they’re going to surprise themselves that they’re going to end up with a very strong recovery in jobs, that we’re going to end up with more inflation than we expect. And so they’re going to raise rates sooner than they think they’re going to.
What else could go wrong?
Q. WOULD THAT SLOW THE ECONOMY OR POTENTIALLY CAUSE A RECESSION?
A. There’s two scenarios for the Fed. The most likely one is that our unemployment rate is quite low in 2022. Inflation is running above trend.
And so the choice is very easy. They’ve achieved roughly their maximum employment mandate. They raise rates.
The bad scenario for the Fed would be the unemployment rate remains elevated and inflation is running at 3% and then their dual mandate will be pulling them in different directions. And I’m not sure how they would resolve that.
From A to Z: Highest price ever for every major commodity
Highest price ever for every major commodity
Prices for nearly every natural commodity have grown over the past year, largely due to the coronavirus pandemic's effect on the economy. Sugar costs grew by 54%, soybeans by 83%, and corn by more than 100%. Commodity prices rise and fall along with supply and demand. The past year stirred up a perfect storm with the shutdown of the economy, supply chain issues and manufacturing plant closures all occurring at the same time. Now that the economy appears to be reemerging, will there be a settling of commodity prices, or will they continue to gain steam and grow?
Stacker researched the highest prices on record for every major commodity, analyzing the Federal Reserve's Economic Data database, or FRED. Data was available from 1990 to 2021, with some commodities having data as far back as 1968. The most recent available price, as of April 2021, is also listed. If a commodity had two or more different measures, the more popular one, according to the Federal Reserve, was used.
While most commodities have not returned to their historic peaks, those who stand to gain—or lose—from the rising prices, are keeping a close eye on what’s to come.
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Aluminum
- Highest price: $3,067.46 per Metric Ton (July 2008)
- Price as of April 2021: $2,190.48 per Metric Ton
Today, aluminum is used in everything from soda cans to spaceships. However, when it was first discovered in the early 1800s by extracting it from ore, lightweight aluminum was more expensive—and coveted—than gold and silver.
Barley
- Highest price: $260.63 per Metric Ton (Aug. 2012)
- Price as of April 2021: $138.98 per Metric Ton
Barley is one of the biggest feed grain crops next to corn and sorghum. Barley is also grown for malt production and human consumption. Because barley is a feed crop, the price usually aligns with wheat and corn. However, as more consumers tout the health benefits of barley, demand and prices may rise.
Beef
- Highest price: 272.30 Cents per Pound (Sept. 2014)
- Price as of April 2021: 224.82 Cents per Pound
A variety of factors can affect the price of beef. If the price of chicken goes up, consumers may buy more beef; if there’s a recall, sales of beef may plummet. Weather, disease, or higher feed prices are additional factors that can result in higher beef prices overall.
Coal
- Highest price: $195.19 per Metric Ton (July 2008)
- Price as of April 2021: $95.23 per Metric Ton
Despite a growing number of environmental groups calling for the phasing out of coal-powered factories in order to slow climate change, coal plants are still being built. Proponents of coal point out that it is a reliable, affordable, and long-lasting energy source that is readily available everywhere in the world.
Copper
- Highest price: $9,880.94 per Metric Ton (Feb. 2011)
- Price as of April 2021: $8,988.25 per Metric Ton
Copper is a versatile material used in products such as water pipes, cookware, and electrical wiring. At one time, it was thought we may run out of copper. However, experts believe that the copper reserves found in the Earth’s crust, combined with copper recycling efforts, result in at least 200 years of copper reserves.
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Corn
- Highest price: $333.00 per Metric Ton (July 2012)
- Price as of April 2021: $245.76 per Metric Ton
Corn prices have skyrocketed over the past year. The U.S. is the top producer of corn in the world, with two-thirds of the corn going to feed livestock, not humans. Corn is also used to make ethanol, an ingredient in automobile gasoline. High fructose corn syrup, cereal, corn starch, and many other products are also made with corn. The demand for ethanol has a big effect on corn prices, so if consumers are purchasing less gas, corn prices could go down.
Cotton
- Highest price: 229.67 Cents per Pound (March 2011)
- Price as of April 2021: 91.45 Cents per Pound
The U.S. is the third-largest producer of cotton, behind China and India. Paper currency in the U.S. is composed of 75% cotton. When the price of competing materials such as polyester are less expensive, cotton is less in demand and prices go down.
Crude oil
- Highest price: $133.88 per Barrel (June 2008)
- Price as of April 2021: $61.72 per Barrel
Crude oil prices are largely dependent on supply and demand. When prices go up, it means there’s more demand for petroleum products. When prices fall, it means there’s an overabundance of supply on hand. Seasonal changes, such as hurricanes and freezing, which can affect how long it takes to transport crude oil, have also resulted in temporary price hikes.
Gold
- Highest price: $1,971.17 per Troy Ounce (Aug. 2020)
- Price as of April 2021: $1,758.80 per Troy Ounce
In times of economic downturns, gold is seen as a safe investment. Over the past year, there has been less gold mining, creating less supply and more demand of the precious commodity. International prices and exchange rates for gold further cause a spike in gold prices—particularly in countries such as India, the world’s second-largest gold consumer.
Iron ore
- Highest price: $187.18 per Metric Ton (Feb. 2011)
- Price as of April 2021: $166.74 per Metric Ton
The demand for iron ore continues to increase as China grows its crude steel production. Iron ore is a rock that steel is extracted from. The process of extracting the steel is said to cause pollution, but production runs are reaching an all time high, regardless.
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Natural gas
- Highest price: $13.42 per Million BTU (Oct. 2005)
- Price as of April 2021: $2.66 per Million BTU
Prices for natural gas increase or decrease depending on factors such as hot or cold weather that require air conditioning or heaters. The U.S. produces the majority of its own natural gas and has ramped production since 2005, helping prices to stay low.
Nickel
- Highest price: $51,783.33 per Metric Ton (May 2007)
- Price as of April 2021: $16,406.66 per Metric Ton
Nickel is derived from both mining ore and recycling. The resulting metal is used in hundreds of thousands of everyday products. One of the biggest indicators that determine nickel price increases is demand from China. The country depends on nickel for everything from batteries to stainless steel products, regularly requiring more than half of the global nickel supply.
Olive oil
- Highest price: $6,241.91 per Metric Ton (Dec. 1996)
- Price as of April 2021: $3,933.92 per Metric Ton
Olive oil consumption continues to rise along with prices. A less-than-stellar growing season in several olive producing countries has created a slightly lower supply of olive oil; and an agreement in March of 2021 between the U.S. and Europe to enact a four-month-long freeze on tariffs resulted in higher demand.
Poultry
- Highest price: 159.95 Cents per Pound (June 2018)
- Price as of April 2021: 113.40 Cents per Pound
An unexpected winter storm in Texas coupled with the increasing popularity of chicken sandwiches and chicken wings caused a spike in poultry prices. While experts stop short of calling it a chicken shortage, the supply has been strained. Prices will decrease, and supply will increase, in the coming months.
Rice
- Highest price: $1,015.21 per Metric Ton (April 2008)
- Price as of April 2021: $502.35 per Metric Ton
India, currently experiencing lockdowns due to COVID-19, is the largest exporter of rice. Less production may translate to higher prices for this popular commodity. Rice has already experienced an average price inflation of more than 2% each year since 1997, according to the U.S. Bureau of Labor Statistics.
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Rubber
- Highest price: $280.79 per Pound (Feb. 2011)
- Price as of April 2021: $108.16 per Pound
The automotive and healthcare industries are steadily pushing the price of rubber higher as demand increases for gloves, tape, tires, and more. Rubber shortages are also occurring due to a stockpiling of the commodity in China and a need for new rubber sources. The natural rubber used today is found inside plants, most of which are located in Asia.
Soybeans
- Highest price: $615.85 per Metric Ton (Q3 2012)
- Price as of April 2021: $510.67 per Metric Ton
Soybean prices are the highest they’ve been since 2012, according to MarketWatch. Many forecasters believe that the commodity, which is mostly used for animal feed, will be in short supply through 2022, with excess availability running thin.
Sugar
- Highest price: 29.73 Cents per Pound (Jan. 2011)
- Price as of April 2021: 15.81 Cents per Pound
Sugar is a commodity found in a wide variety of foods. Not only can the price of sugar be affected by weather conditions such as drought and flood, but gas demand can also play a role. In Brazil, the ethanol used to power vehicles in the country is created using sugarcane. As gas demand increases, so does the demand for sugarcane, making prices for both rise together.
Wheat
- Highest price: $403.81 per Metric Ton (March 2008)
- Price as of April 2021: $229.89 per Metric Ton
Commercial wheat sales have been down, according to experts, who also note continuing drought conditions in much of the wheat growing regions. China is currently the largest producer of wheat, with America coming in fourth.
Zinc
- Highest price: $4,381.44 per Metric Ton (March 2006)
- Price as of April 2021: $2,791.94 per Metric Ton
Zinc prices are inching to their highest level since 2008, according to experts who point to a power shortage in China as the culprit. Manufacturers depend on zinc to create parts for automobiles, hardware, and electrical devices to help prevent rust.
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Q&A: Why are fears of high inflation getting worse?
What's behind the concerns about inflation?
Mainly, it's the fact that prices for so many things are rising and seem likely to do so for the next several months at least. One reason for that is that prices tumbled in March and April of last year, when the pandemic tore through the economy, and have since rebounded. As a result, year-over-year price increases now look much higher than most consumers are used to. The consumer price index rose 2.6% in March compared with a year ago, a significant rise from just 1.7% a month earlier. Analysts forecast that consumer prices will soar again in April when that month's figures are reported Wednesday, to a year-over-year reading of 3.6%. If that prediction is accurate, that would be the largest increase in nearly a decade.
Another factor is a widespread shortages of raw materials and parts that is magnifying costs. Builders can't find enough lumber to build new homes. Manufacturers are desperate for more copper and other commodities. Auto makers need more semiconductor chips. And some restaurants are scrambling for chicken wings.
Supply bottlenecks have occurred because companies were caught flat-footed by the speed of the economic recovery from the pandemic, with most consumers flush with cash, after multiple stimulus checks, and spending freely. With everyone now ramping up at once, manufacturers, shipping firms, miners and agricultural companies can't keep up.
Will Americans' paychecks increase, too?
Paychecks are starting to rise. Average hourly earnings jumped 0.7% in April, a substantial gain for a single month. Many companies have said they are struggling to attract applicants to fill their open jobs. Only 266,000 jobs were added last month, far fewer than expected. Rising pay is a sign that companies are trying harder to fill their jobs. That's good for workers, and many companies may eat the higher cost or turn to automation to reduce their labor expenses. But if businesses start to raise their prices to cover higher wage bills, that would accelerate inflation.
It's the Fed's job to keep prices in check. What do its officials think?
Powell said last month that he expects higher inflation to prove temporary, once the supply shortages are worked out. The Fed's policymakers have stressed that one-time increases are not the same thing as a difficult bout of inflation, which is characterized by ongoing, chronic price increases.
"A persistent material increase in inflation would require not just that wages or prices increase for a period after reopening, but also a broad expectation that they will continue to increase at a persistently higher pace," Lael Brainard, a Fed governor and key voice on the central bank's interest rate policies, said in an appearance Tuesday. "A limited period of pandemic-related price increases is unlikely to durably change inflation dynamics."
Why is the Fed so sure that price increases will prove fleeting?
Two reasons: Because the public still largely expects inflation to remain in check and because of recent history.
The Fed is closely monitoring "inflation expectations." These are measures of where consumers and financial markets expect inflation to be in the future. Inflation expectations have changed little for more than two decades, even amid sharp price fluctuations, such as a spike in oil prices in 2008 that took oil to nearly $150 a barrel. If the public expects inflation to stick around 2%, then consumers and businesses won't likely change their behavior much even if commodity prices rise. Businesses won't charge their customers more, because they'll expect the increases to be temporary. And workers won't generally demand large wage increases to offset higher prices.
Some measures of inflation expectations are rising, but not markedly so. Financial market measures, based on the yields of different Treasury securities, show that investors' expectations for inflation are increasing in the short-run but less so over the longer-term. That suggests that they agree with the Fed: They expect a temporary increase in inflation. But they also think that entrenched inflation expectations will prevent price rises from running rampant.
Another reason the Fed thinks inflation will likely be temporary is that prices have been in check for roughly a quarter-century. Even when the unemployment rate fell to a 50-year low of 3.5% in 2019, forcing wages higher, consumer prices remained below the Fed's 2% target.
What will the Fed do if inflation stays too high?
Powell has said repeatedly that the Fed has the "tools" to address higher inflation: It could reduce its bond purchases of $120 billion in Treasurys and mortgage-backed securities each month, which are intended to lower long-term interest rates. And it could also raise its short-term rate from its current level near zero. This rate influences borrowing rates throughout the economy. Such moves would likely rein in inflation. But they could also slow the economy or even cause a recession.
