Inflation isn’t just a symptom of supply shortages and shipping delays. In fact, it’s about something potentially more lasting, some economists say—a spike in consumer demand for stuff.
The amount of money people are spending on things (and by things we mean goods you can see and touch rather than airfare, a dinner out or getting medical treatment) has increased sharply in the pandemic, even if consumers pulled back a bit over the summer due to the fast-spreading delta variant of coronavirus, the chart below shows. In fact, these spending levels aren’t just higher than pre-pandemic levels, but about 8% higher than you’d expect if the growth trajectory before the pandemic had continued, according to Douglas Porter, an economist at BMO Capital Markets.
“Yes, supply chains are clearly groaning and stressed at seemingly every turn,” Porter wrote in a recent commentary. “But that is because demand for goods has leapt off the charts, and supply simply can’t keep pace.”
What’s more, the spending figures don’t even account for what might be happening if everything people wanted—including during the holiday shopping season—was actually available to them, economists said.
“People want to purchase things and they just aren’t able to find them in stock,” Bryce Gill, an economist at First Trust Advisors, said in an email. “Final sales are definitely being held back by supply chain issues.”
Why so much demand for things? For one, unprecedented levels of pandemic-era aid from the government, and not just for people who lost their jobs, helped push the national household savings rate to a record high early in the pandemic. Only in September did it finally return to pre-pandemic levels. Plus, when COVID-19 cases spiked in the summer, travel and going out was less appealing, economists said, so there were fewer outlets for spending.
All of that means higher inflation rates—now at the highest levels in decades—won’t go away just because supply issues do, Porter said. It may require a bigger shift in consumer habits, a shift toward services and away from goods.
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