Gas prices have fallen. Here’s why inflation hasn’t
But no one has sipped the champagne yet. Although gasoline prices have played a significant role in the current historic inflation spurt, analysts warn that there are still a number of factors that will keep overall prices from falling anytime soon.
“Russia and Ukraine are a factor but … we had tight reserves,” said Rob Haworth, senior investment strategist at US Bank Wealth Management. “We would like to see an end to the conflict in Russia and Ukraine. But I think we are still facing a global economy that lacks oil in the short term.”
Another factor is the reluctance of US producers to invest big money in extracting and, more importantly, refining fossil fuels when long-term political goals suggest diminishing returns from switching to renewables.
“There is a structural problem with the oil and gas industry and it has to do with refining capacity,” said Jeff Klearman, portfolio manager at ETF firm GraniteShares. “Oil companies, not only in the United States but around the world, have not increased their refining capacity. This continues to put pressure on gas prices.”
Peter McNally, global head of the industries, materials and energy sector at investment firm Third Bridge, said there was “misunderstood criticism” of rising refiner profits, pointing to the investments made to convert existing refining facilities to process biofuels. “These companies are investing for the energy transition,” he said.
Housing is getting more and more expensive
“Housing prices will likely stay high and, in a sense, keep inflation high for longer,” Stovall said.
Distorted demand and labor shortages
“Inflation is primarily caused by excess demand for too few goods,” said David Dollar, senior fellow at the Brookings Institution.
This demand has led to factory closures in China, causing cascading maritime traffic jams in Pacific ports. When the ships docked, there were not enough workers to unload the cargo or drive the trucks that would transport it first to warehouses and then to consumers.
“Overall demand for goods has increased quite dramatically, so suddenly we’ve asked our system to handle a lot more stuff,” Dollar said. The result was chaos and a sudden demand for workers – at all costs.
“The lack of truckers reflects [that] we need more workers than we actually have, and that’s solved by higher wages,” Haworth said. In June, there were more than three-quarters of a million more workers in the transportation and warehousing sectors than before the pandemic.
Salaries and raises
Economists expect wage gains, which have hovered just above 5% on an annualized basis, to moderate for the rest of the year. But employers still face a severe labor shortage, forcing companies to offer competitive salaries to attract and retain talent.
“What we don’t yet clearly know is what is the new post-pandemic normal when it comes to demand? Right now it looks like wage pressures have been there for a while,” Haworth said. .
Indeed, unlike supply chain grunts or even soaring commodity prices, the inflation creeping into wages is not easily undone. Even though companies may pay less for components or raw materials, they are unlikely to implement pay cuts, so inflation persists.
“It’s strongly correlated with wage growth. That’s not to say higher wages are a bad thing,” Haworth said. “When people have more money, they can buy more stuff. But if there isn’t more stuff, the prices go up. Ultimately, that translates into some pressure on the prices of everything else.”
Recent wage gains follow fiscal and monetary policies that have contributed to a cash-flooded economy due to stimulus payments to individuals and businesses, as well as quantitative easing by the Federal Reserve.
“They pumped a ton of money into the system,” Klearman said. Like higher wages, all that cash — and too few goods to spend it — is another contributor to the price hikes consumers are experiencing on everything from cars to camping gear to cookies.
The light at the end of the tunnel?
Despite expectations that inflation is likely to hold until 2023, there is some bright spots.
Along with paying less for commuting and shopping, Stovall says high airfares could come down to earth, and supermarket shoppers could see some grocery costs drop slightly if producers or distributors don’t have to. pay as much for transport in order to put their goods on the shelves. “You might start to see some food price competition start to enter the market as the cost of transportation inputs start to come down,” he said.
“Certainly it would make sense to remove the tariffs now,” Dollar said. “They’re not hitting any targets and they’re being paid for by American households.”