Earlier this year, I warned that prices could rise. Those fears came to fruition in April, as the Consumer Price Index, which measures what people pay for all goods and services, jumped by 4.2% from a year ago. It was the strongest annual increase since 2008. The core CPI, which strips out the volatile food and energy components, increased by 3% from a year ago, a nearly 30-year high. Let's not conflate this report with the Colonial Pipeline issue — the reporting period for the April CPI occurred before that shutdown.
There are a few reasons prices are rising:
1 We are comparing where we are today with the depressed numbers from the pandemic onset last year, when the economy shut down and prices plunged.
2 Supply chain issues, which were a bit shaky before the pandemic because of trade disputes, got worse as producers had to deal with sudden changes in safety procedures and a surge in consumer demand for goods.
3 Demand is jumping as vaccinations continue and many local economies open, newly flush with cash.
My favorite example of how inflation has increased seemingly out of nowhere is lumber. Early in the pandemic, sawmills shut down production in anticipation of an economic slump. They may have been right about the slump, but they had no way of anticipating that it would be short-lived, at least when it came to housing. Demand went from zero to 60 in weeks, as people sought to remodel or build new homes. A year later, the price of lumber is up more than 400%, adding nearly $36,000 to the price of an average new single-family home, according to the National Association of Home Builders.
Similarly, last spring chip manufacturers made what they believed was a smart decision: concentrate on producing semiconductors for consumer electronics, which would no doubt boom as the country was sitting at home in front of screens. That decision came at the expense of making chips for vehicles, which many believed would be hit hard by the pandemic. Few anticipated that the pandemic would spur a broad-based auto-buying spree. We are seeing prices surge for new, used and rental cars and trucks. In addition, as more people are driving, gas prices are up nearly 50% from a year ago, the largest annual increase in more than a decade.
For context, even with the 12-month surge, inflation remains below where it was for much of the 2000s — and where it was before the pandemic. Compared with two years ago, prices were up a less worrisome 2% in April. But we are humans and are often influenced by what has just happened. Behavioral economists call this "recency bias," which means that we believe that what has just happened will continue to occur in the future.
And when it comes to inflation, recency bias can make matters worse — just look at the nervous people in the Southeast who were filling cars and gas cans to the hilt, just in case. There was no reasoning with those who were fearful of rising prices — amid limited supply, consumers drove prices even higher. Economists worry that if these feelings spread beyond the gas pumps to other parts of the economy, inflation could stay elevated for a while.
One upside to inflation, according to Mark Miller of RetirementRevised, is that there could be "a hefty Social Security cost-of-living adjustment [COLA] for 2022." Estimates range from 3% to 4.7%, a huge increase from the measly 1.3% COLA in 2021. Unfortunately, until retirees actually see that increase, Miller says, seniors might still struggle to absorb higher prices.
Jill Schlesinger, CFP, is a CBS News business analyst. She welcomes comments and questions at firstname.lastname@example.org.