How inflation and tangled supply lines grip the economy

WASHINGTON (AP) — Since the pandemic hit two years ago, Forest Ramsey and his wife, Kelly, have kept the line on prices at their gourmet chocolate shop in Louisville, Kentucky. Now they are about to throw in the towel.

Over the past year, ingredient costs for their business, Art Eatables, have jumped 10-50%. The Ramseys pay their employees 30% more than before the pandemic.

And in the face of supply shortages, their packaging costs are rising. They started using 12-piece trays in their eight-piece chocolate boxes because they can’t get eight-piece trays anymore.

So after trying to survive for the past two years, the Ramseys, who own three outlets and sell custom chocolates to about two dozen bourbon distilleries, have made an unpleasant decision: They will raise their customer prices by 10% at 30%. %.

“We have to adjust that – we can’t afford to keep taking the hits anymore,” Forest Ramsey said.

The struggles of Art Eatables illustrate how inflation and tangled supply chains have seeped into almost every corner of the economy, forcing consumers and businesses to make painful decisions that many of them don’t. have never had to consider before. While the government announced on Thursday that consumer inflation had hit 7.5% in the past year – a 40-year high – the acceleration in prices leaves few unscathed.

Some of the supply chain issues that have amplified inflation since the pandemic recession may begin to ease in the coming months. If so, inflation would likely moderate somewhat.

Still, the key trends that have driven prices higher — higher wages, parts shortages, rent increases, robust consumer spending — are unlikely to fade any time soon. And it’s unclear when, or by how much, inflation might actually slow.

Wage increases, while good for workers, have led many other retail and restaurant chains, from Starbucks to Amazon to Chipotle, to charge customers more. When Amazon announced last week that it was raising the price of its annual Prime subscriptions from $119 to $139, it pointed to increased labor and shipping costs.

And an acceleration in apartment rents, many economists say, will likely help keep inflation going at least through the end of this year. Rising prices also extend from pandemic-hit industries, including automobiles, to broader categories of goods and services, from electricity to clothing to airline tickets. This suggests that high inflation will survive COVID-19.

Neil Dutta, an economist at Renaissance Macro, noted that even if you exclude from the government’s consumer price index the costs of food, energy, housing and used cars – some of the categories to the fastest rise during the pandemic – prices still rose 0.7% from December to January. This is even above the 0.6% increase in overall consumer prices, a stark illustration of the generalization of price increases.

Many large companies claim that even after raising their prices, their customers continued to buy. Rising wages and rising savings, spurred by significant government stimulus measures last year, likely helped sustain strong consumer demand. Over time, however, high levels of spending and wages can fuel further price increases in a continuing spiral.

“We saw no significant impact on customer demand,” Starbucks chief operating officer John Culver said on a conference call with investors, referring to the company’s two price hikes. Last year. “On the contrary, demand from our customers continues to grow.”

Starbucks CEO Kevin Johnson said further price increases are planned for this year.

Many analysts had warned that spending would slow once government stimulus programs expire. But early signs suggest that didn’t happen. Bank of America said this week spending through its credit and debit cards and digital platform jumped 17% from the same month a year ago, about double the pre-pandemic pace. The rise doesn’t just reflect price increases. Transactions increased by 10%.

Brian Moynihan, CEO of Bank of America, suggested in an interview with The Associated Press that the rise in spending reflected rising wages, rather than just the fact that Americans were taking on more debt. And even with all the expenses, he said, customers’ bank accounts have still grown over the past year.

Rising apartment rental rates emerged as a major contributing factor to the surge in inflation. Average rents rose 0.5% in January, the biggest increase in 20 years, and were up 4.4% from a year ago.

More Americans have returned to cities, after some left in the early months of the pandemic. The apartment vacancy rate has hit its lowest level since the mid-1980s, according to a report from the Harvard Joint Center for Housing Studies. And with strong job growth, more young people are expected to move on their own, increasing demand for apartments.

With house prices high, more high-income Americans are also renting, allowing landlords to charge higher rents and crowd out other renters. Asking prices for new apartment leases jumped nearly 11% last fall from a year earlier, according to the Harvard study. This increase will take time to trickle down to inflation figures, as it measures all rents, including renewals.

Wage growth, by some measures, is accelerating further, which will keep pressure on small and large companies alike to offset increases with greater efficiency or raise prices. The average hourly wage rose 5.7% in January from a year earlier, the government announced last week. This was up from 5.3% in January 2021.

There are some signs that the engines of inflation may be cooling down a bit. Adam Ozimek, chief economist at Upwork, an independent website, said as more Americans resume their job searches as COVID wanes, increased competition for jobs may slow. wage growth. The proportion of Americans working or looking for work jumped in January, although it is still below pre-pandemic levels.

“The supply of labor is growing rapidly, which will put downward pressure on wages and prices,” Ozimek said.

And new and used car prices, which have been among the main drivers of inflation over the past year, are showing tentative signs of slowing. A shortage of computer chips curtailed new car production even as demand for automobiles was strong.

Used car prices soared nearly 41% in January from a year earlier, while the cost of a new car jumped 12.2%, according to Thursday’s report. However, from December to January, the price of a new car remained unchanged and only increased by 1.5% for a used vehicle, much less than in previous months.

The supply of used cars is growing and automakers are starting to ramp up production, said Kevin Roberts, director of industry analysis for cargurus.com.

“We’re not going to go back to pre-COVID prices, but we could see a drop in new vehicle prices as automakers start making low-cost vehicles again,” Roberts said.