You have watched Bidenflation drive prices higher on nearly everything you can buy. From food to fuel, housing, and healthcare, Americans are paying way more this year than they were a few years ago. There has been some progress made on slowing inflation, but there are signs it may be more difficult to stamp out the last vestiges.
In The Wall Street Journal, Amara Omeokwe explains that one reason inflation slowed was because so many workers came back into the workforce, easing labor shortages and helping to slow price increases. Omeokwe writes:
Many workers came off the sidelines to join the labor force in 2022 and 2023, aiding the Federal Reserve’s fight to tame inflation by easing labor shortages and putting downward pressure on wage growth.
Big additional gains may be hard to achieve.
That matters because inflation remains above the Fed’s 2% target despite a major retreat last year, and policymakers would like to see continued progress before relenting on their restrictive policy stance.
Inflation cooled in part because of improvements on the supply side of the economy. Supply chains continued to heal after Covid-19 pandemic disruptions and employers found more workers available for hire. The result: The economy defied expectations that a pullback in inflation would come at a great economic cost. Instead, growth surged as consumer demand endured and employers added jobs.
That win-win scenario could become harder to sustain without additional supply gains, because a further cooling in inflation might require an easing in demand, which could hold down growth.
Fed policymakers are considering the question of how much more supply the economy has to offer. Several “assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress in reducing inflation may need to come mainly from further softening in product and labor demand,” according to minutes of their December policy meeting. (A few officials assessed there is still room for additional supply gains.)
Another reason it may be difficult to further reduce inflation is that companies are scared to lower prices after getting caught by inflation themselves. They don’t want to lower prices and then get hit with more inflation that will destroy profits.
Action Line: With inflation pressures still working their way through the economy, as an investor, you may need to become a Dick Young-style “inflation dodger.” Click here to subscribe to my free monthly Survive & Thrive letter. And when you want to talk about inflation and your portfolio, I’m here.
