Will inflation return to the lows of before? Not likely say some experts

What started out as a shortage of semiconductors that dramatically impacted the auto industry morphed into many goods from furniture to office supplies becoming scarcer this past year, as goods stayed stuck in ports, and consumer demand soared beyond supply.

Among them were North Bay auto dealers who saw more of their parking lot pavement waiting for cars to come in.

“When the supply chain was constrained, we should’ve seen this coming,” said John Mackey, Santa Rosa-based Exchange Bank’s senior vice president and managing director of the Investment and Fiduciary Services department.

When goods were more accessible, they weren’t cheap. In some cases, prices shot up with double- and sometimes triple-digit increases.

Lumber prices, in particular, skyrocketed to 400% of their pre-pandemic retail rates at the high mark. Gasoline prices topping $5-to-$6 a gallon delivered pain at the pump. Groceries were noticeably pricier at the checkout.

Some economists have referred to the Consumer Price Index (CPI) as the “consumer pain index,” which climbed to 6.8% by the end of November, the U.S. Labor Department reported. In perspective, economists were debating in 2020 whether the alarm bells should sound, when inflationary woes creeped up over 2% and kept going.

Workers also proved more expensive to hire. Many opted to quit their jobs at massive rates, sparking a new term — the Great Resignation — as the pandemic forced many to re-evaluate their living and working standards. Millions of positions remained in flux over the past year or two.

“The scarcity of labor drives the labor costs up and creates the prices of goods to rise,” Mackey said, referring to the pass-along costs of doing business in an inflationary period. “Trade was keeping it down. And the Fed has announced a tapering of its bond buying.”

Part of the balancing act for the Fed, these bond purchases are designed to keep borrowing costs down throughout the economy while staving off market upheaval, economists say. The scale down would allow it to push up interest rates to stymie soaring prices.

But jacking up interest rates comes at its own price. Like clockwork, the Fed runs the risk of also lessening borrowing with higher rates, leading to slowing down persistent economic growth. The Fed’s benchmark rate influences loans on mortgages, vehicles and credit cards.

“The Fed can’t keep holding off interest rates from going up,” Encore Wealth Management financial planner David Brown said, adding fuel costs as one of the “biggest challenges” because “nothing happens in our world without fuel.” The Santa Rosa wealth adviser predicts prices to remain high in 2022.

“Inflation is here to stay. They’ll never go back to where they were,” he said.

And even though the Fed is forced to step back on calling this period of inflation as short-lived, this economic hiccup is seen as benign compared to the 1970s, when it soared into the double digits.

Much of the recovery lies in whether Americans go back to work, which many agree will ramp up in 2022 from the end of 2021 standing at 4% unemployment. That’s about a quarter of the pandemic’s high jobless mark in spring of 2020.

But for all the dire predictions of high unemployment leading to the economy plunging into an abyss, Americans have remained steady consumers.

“Consumers, for the most part, are strong, and wages are rising,” JP Morgan Chase Private Bank’s San Francisco regional office’s Managing Director April Kupper told the Business Journal, insisting the labor market is building strength.

These consumers hold the keys to economic growth in 2022, according to a report outlining an economic outlook released on Dec. 6 by Kupper’s financial services company headquartered in New York, with more than a handful of Sonoma County branches.

The report titled, “Preparing for a vibrant cycle” declares the economy — buoyed by companies investing in more innovation than previous years — will build significantly by the middle of 2022.

That recovery is contingent on not only keeping inflation in check but in also tracking the perplexing labor force. The 5.5 million unemployed, not counting the 1.5 million who retired during the pandemic, is expected to step back onto the job without augmented unemployment and lessening virus threats as we enter 2022.

“The most likely path forward seems to be that solid job gains and moderating inflation in 2022 will keep the Fed on track to likely begin raising rates toward the end of 2022 or the beginning of 2023,” the report reads.

“This year was a marathon, and I think everyone’s exhausted,” Kupper said. “But inflation seems to have peaked. Yes, it’s scary at 6%. But it’s going to take some time to unwind the damage of COVID. The economy is OK.”