America suffers from sharp price increases

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America suffers from sharp price increases

From now on, things at Dollar Tree can also cost 1.25 or 1.50 instead of the fixed 1 dollar. The grab chain, the last of its kind (think Family Dollar, Dollar General, etc.) to actually sell cutlery, stuffed animals, Bibles and cans of sugary soft drinks for $1, has also had to bow its head in the past month due to the price increases that the hold the United States. The costs of supplying their cheap products have risen so much that the company has turned to it, explained CEO Michael Witynski.

Dollar Tree is a rewarding example to illustrate inflation in the US, as shown by tweets from opposition politicians. Prices rose by 5.4 percent in September compared to a year ago. Prices rose by 0.4 percent between August and September alone. Americans notice it every day what they pay in the supermarket and at the pump: gasoline has become an average of 45 percent more expensive this year.

Economists and analysts are slowly starting to adjust their predictions about inflation after the corona pandemic. Initially, the increased costs of imports and transport, and the associated price increases in specific sectors, were seen as the inevitable shocks to restart the economic engine: supply and demand were simply balancing, inflation was a temporary side effect.

But two weeks ago, central bank president Jerome Powell gave a press conference in which he first predicted that the longer will last for a while before prices fall again. Possibly not until the next year.

Decline in purchasing power

Inflation is bad news for the president and the Democratic Party, who rule the country by a slim majority. They won the November 2020 election under the slogan ‘Trump has made a mess, we’re going to clean up the mess and reform’. Biden promised to tackle the two most pressing crises first: the pandemic and the economy. The summer peak of the virus has indeed left the Americans behind. But the economy is doing worse than forecast across the board.

The increased costs for supply lead to higher prices and thus to a decline in purchasing power. The Ministry of Employment found this week that real income has fallen by an average of 0.8 percent in the past year.

In addition, unemployment remains a tough problem. In September, the number of jobs – except seasonal labor in agriculture – grew by 194,000. The unemployment rate is now at 4.8 percent, much higher than the 3.5 percent in February 2020, the last ‘normal’ month before parts of the economy were shut down to fight the coronavirus.

Bloomberg news agency found after ten in-depth interviews that of the “five million unemployed people who are missing”, a large number no longer want and will return to their old jobs, even though there are more vacancies than unemployed. The respondents no longer saw the point of temporary jobs that yielded too little for them to pay the fixed costs, they were afraid of new variants of the corona virus, or they knew that they could demand a higher salary than the employers are now willing to pay.

By the way, not all numbers are bad. Consumer spending has skyrocketed: yet another cause of inflation. Between the fourth quarter of 2019 and the latest monthly report from the Department of Labor, Americans spent 18 percent more on goods. Goods prices were therefore more than 9 percent higher in September than a year ago. Over the same period, spending on services fell by 3.2 percent.

Difficult choices

The combination of high consumer demand, high inflation and low unemployment presents Biden and Fed President Powell with tough choices. Which buttons should they turn?

Biden chose the supply lines first. He announced this week that the Port of Los Angeles, Asia’s largest import port for products, will process goods 24 hours a day and that major retail chains such as Walmart will be pruning their sprawl of containers on the gigantic site. Biden hopes to increase the supply and thereby push prices down somewhat.

Unemployment is a different story. Biden has campaigned with a program that also included higher salaries. Job seekers who no longer accept low wages find the Democrats on their side. That’s a delicate balance, because the pressure of high salaries will be felt the hardest among small businesses, and they too have Biden’s sympathy.

Meanwhile, economists are also rising up who use the adage never waste a good crisis handle. In August, at the Federal Reserve’s annual meeting, University of Chicago macroeconomist Veronica Guerrieri presented a study showing that inflation can be a good tool to implement necessary economic reforms. Sectors that have been hit hard by Covid (services, office real estate) will have to lose weight compared to sectors that are thriving in the ‘new normal’.

If people don’t want to go back to low-salary jobs, those companies will shrink or disappear in favor of companies that can offer a higher salary. And if people don’t want to go back to the office, producers of the technology that helps them work from home will benefit. Inflation, argued Guerrieri, can be a good incentive. For now, Biden has not embraced the choice of such a hard restructuring.

A version of this article also appeared in NRC Handelsblad on 16 October 2021

A version of this article also appeared in NRC on the morning of October 16, 2021

America suffers from sharp price increases
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