Sticky prices

Catherine Rampell had an interesting column dealing with the question of when prices will “come back down?” Rampell correctly answered “never,” but I am not convinced this is the real question people are posing.

Rampell deals with the question as being one about the overall Consumer Price Index (CPI). She is explicitly not talking about the price of the everyday items, like food and gas, that people purchase regularly. This distinction is my reason for skepticism. First, the price of many food items has come back down. Overall food prices have not, but it actually is plausible that we will see further declines in the food basket.

The prices of most commodities, like wheat and corn, are pretty much back to their pre-pandemic level. Shipping costs have also fallen back to roughly pre-pandemic levels. And, corporations are complaining that they are losing some of the pricing power that they had during the pandemic.

All of this translates into a picture where the rate of inflation in food prices may drop further (the annual rate was 1.6 percent over the last three months) and could possibly turn negative. I doubt that food prices will fall back to pre-pandemic levels, but we may see the overall index decline for a period of time.

We see a different picture with gas prices. Production cutbacks by Saudi Arabia (was there a “perfect phone call” from Donald Trump?) have sent crude oil prices from $70 a barrel to $90 a barrel, raising gas prices back to almost $3.90 a gallon as a nationwide average.

However, it is plausible that these prices will fall again. For better or worse (obviously worse from a climate perspective), US oil production is at a record high.

Exploding growth in the EV market, especially in China and Europe, will reduce demand. Maybe Saudi Arabia will respond with further cuts (I don’t have a crystal ball), but it is not absurd to think that gas prices will come back down.

Anyhow, the point here is that the prices that are most directly in people’s faces can come back down. When we move beyond these prices to items like rent, owners’ equivalent rent (the rent you would pay yourself for living in a home you own), and new car purchases, I’m not sure that these fit well into most people’s conceptions of inflation.

Owners’ equivalent rent accounts for over a quarter of the CPI, do the two-thirds of households who own their home actively think about how much it would cost them to rent the place? Most people rarely buy a new car, and even used car purchases are not frequent (used car prices have been falling over the last year).

I also doubt that many people other than economists and people who write on economics have a clear vision of the overall CPI or the price index of their choosing.

For this reason, I’m not sure that many people really expect prices to come back down. Average hourly wages have risen by almost 20 percent since the start of the pandemic, do people really expect that they will pay the same for stuff as they did in 2019?

Excerpted: ‘Do People Really Expect Prices to Fall Back to Pre-Pandemic Levels?’. Courtesy: Counterpunch.org