Surging sales and input costs being reported

The United States economy is now exhibiting pockets of price pressures, amid reports of surging sales and input costs.

This has fuelled the debate among economists and market participants over the future path of inflation. Yesterday retail sales made their strongest advance in seven months, topping all estimates and indicating hearty consumer demand at the start of the year.

This was complemented by producer prices surging last month, the most since 2009, while a private survey of homebuilders showed growing concern about soaring costs of building materials after a robust year for home sales. While inflation is expected to pick up this year, particularly in the second quarter, many economists including those at the Federal Reserve anticipate that annual price gains will exceed the two per cent target projected by the Fed.

A report from the US Labor Department showed the cost of lumber and other construction materials went up by 10.4 per cent from January of last year, the most on record. Softwood lumber surged 73 per cent, as price pressures have developed within manufacturing, where materials costs rose in January by the most since 2018.

The impact of the relief package passed in December was evident in the 5.3 per cent jump in retail sales, as US$600 stimulus payments lined the pockets of consumers. Many Americans are however saving rather than spending. This in anticipation of a resurgence in demand later this year for services that have been particularly hard hit by the pandemic.

Fed dispel talks of an overheat of the economy

Fed Chair Jerome Powell has rubbished assertions of an anticipated overheat of the economy with additional stimulus, pointing out in a recent speech that it could take “many years” to overcome scars from long-term unemployment.

For their part, Fed officials at the January policy meeting “stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation”.

For his part, Boston Fed President Eric Rosengren said yesterday that he wouldn’t be surprised to see higher inflation prints in the near term – with some prices moving up and statistical comparisons to the low inflation figures last year. However, he doesn’t expect to see sustained two per cent inflation for the next two years as long as unemployment remains high.