Gasoline prices have fallen. Here’s why inflation hasn’t

But no one is uncorking the champagne yet. Although gasoline prices have played an important role in the current episode of historical inflation, analysts warn that a series of factors persist that will prevent general prices from falling in the short term.

“Russia-Ukraine is a factor, but … we were in short supply,” said Rob Haworth, senior investment strategist at US Bank Wealth Management. “We would love to see an end to the conflict in Russia and Ukraine. But I think we are still facing a global economy that is short of oil in the short term.”

How does inflation affect my standard of living?
Aside from Russia’s war with Ukraine and sanctions that have disrupted its oil exports, the unwillingness (or inability, according to some oil analysts) of members of the Organization of the Petroleum Exporting Countries to significantly increase production is limiting the amount of additional oil. is reaching global markets. The oil group and its partners, known as OPEC+, last week announced a small production increase of 100,000 barrels per day for September, less than the market expected.

Another factor is the hesitation of US producers to invest big money in extracting and, more importantly, refining fossil fuels when long-term policy goals suggest diminishing returns in the face of a shift to renewable energy.

“There is a structural problem with the oil and gas industry and that has to do with refining capacity,” said Jeff Klearman, portfolio manager at ETF firm GraniteShares. “Oil companies, not just in the United States but globally, have not expanded refining capacity. That continues to put pressure on gasoline prices.”

Peter McNally, global industry, materials and energy leader at investment firm Third Bridge, said there were “misunderstood criticisms” of soaring refinery profits, pointing to investments being made to convert existing refining facilities. to process biofuels. “These companies are investing for the energy transition,” he said.

housing is still more expensive

Housing is a large part of the average family budget and is also a large part of the basket of goods and services that the government uses to calculate inflation. The way the Bureau of Labor Statistics calculates the cost of housing makes it a very influential piece of the Consumer Price Index. Housing costs include owners’ equivalent rent and rent of primary residence, which captures how much both owners and renters pay to live in their homes. Housing comprises about a third of the headline CPI and accounts for about 40% of the core CPI, which excludes food and energy prices.
“The important thing is housing,” said Sam Stovall, chief investment strategist at CFRA Research. “While we have been watching New and existing home sales begin to declineprices they haven’t been going down because there is still more demand than supply”.
Existing home prices hit a new record of $416,000 in June, up 13.4% from a year ago. a february report found that, at the median, renters earning the typical household income in their area pay nearly 30% of their income in rent, a threshold that policymakers consider “rent-burdened.”
Additionally, the double whammy of higher prices and high mortgage rates continues to put homeownership out of reach for many, with more and more families forced to stay on the sidelines as the impact of aggressive rate hikes by the Federal Reserve raises the cost of buying a home.

“House prices are likely to stay elevated and, in a sense, keep inflation high for longer,” Stovall said.

Distorted demand and worker shortages

Since the pandemic, there has been an increase in demand for physical goods. supply chains completely out of control, messing up logistics and causing huge price distortions.

“Inflation is primarily caused by excessive demand chasing too few goods,” said David Dollar, a senior fellow at the Brookings Institution.

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This demand led to factory closures in China, leading to cascading maritime traffic jams at Pacific ports. When the ships docked, there were not enough workers to unload cargo or drive the trucks that would transport it first to warehouses and then to consumers.

“Overall merchandise demand increased quite dramatically, so all of a sudden we were asking our system to handle a lot more stuff,” Dollar said. The result was chaos and a sudden clamor for workers, at any cost.

“The lack of truckers reflects [that] we need more workers than we actually have, and that is being solved through higher wages,” Haworth said. As of June, there were more than three-quarters of a million additional workers in the transportation and warehousing sectors than before the pandemic.

Salaries and stimulus

Economists expect wage gains, which have been hovering just above 5% on an annualized basis, to moderate over the rest of the year. But employers still face severe worker shortages, putting pressure on companies to offer competitive wages to attract and retain talent.

There was 10.7 million unfilled jobs in June, the BLS reported last week. Though down from a record 11.7 million in April, that’s still nearly two open positions for every jobless American worker.

“What is not yet clear to us is what the new post-pandemic normal is when it comes to demand. For now, it looks like salary pressures are here for a while,” Haworth said.

That’s because, unlike supply chain grunts or even commodity prices, inflation that creeps into wages isn’t easily undone. Even if companies can pay less for components or raw materials, they are unlikely to implement pay cuts, so inflation persists.

“It is highly correlated with wage growth. That’s not to say higher wages are a bad thing,” Haworth said. “When people have more money, they can buy more things. But if there aren’t really more things, prices go up. Ultimately, that translates into some pressure on the prices of everything else.”

Recent wage increases come on the heels of fiscal and monetary policies that contributed to an economy awash in liquidity as a result of stimulus payments to individuals and businesses, as well as quantitative easing by the Federal Reserve.

“They pumped a ton of money into the system,” Klearman said. Like higher wages, all this cash — and too little goods to spend it on — is another contributing factor to the price hikes consumers are experiencing on everything from cars to camping gear to cookies.

Light at the end of the tunnel?

Despite expectations that inflation will probably continue until 2023, there are some bright spots.

In addition to paying less to travel and run errands, Stovall says high-flying airfares could come back down to earth, and supermarket shoppers could see some grocery costs drop slightly if growers or distributors don’t have to pay as much for transportation to be able to get your products to the shelves. “You could start to see some food price competition starting to enter the market as the cost of transportation inputs starts to come down,” he said.

While supply chain growls continue in some sectors, General Motors told investors on its quarterly conference call last month that it made 95,000 vehicles during the previous quarter that can’t be finished or sold because the company can’t get the parts it needs to finish them; there is a feeling that the previous period of the traffic jam is easing.
There have also been some recent high-profile cases of retail markdowns: Walmart and Target said have had to slash prices to get rid of large amounts of unsold inventory that has remained on the shelves as Americans have shifted their spending back to services like dining out and live events.
There is also renewed hope, albeit uncertain, that President Joe Biden Back one or more tranches of punitive tariffs Trump has imposed on China in what experts say was a largely unsuccessful attempt to force Beijing to buy more American farm products and other key exports.
A analysis by the Peterson Institute for International Economics estimated that, over time, reducing the tariffs imposed by Trump and others could reduce inflation by as much as 1.3 percentage points, saving the average American household about $800 a year.

“It would certainly be smart to remove the tariffs now,” Dollar said. “They don’t meet any targets and American households pay for them.”

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