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.”
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
“House prices are likely to stay elevated and, in a sense, keep inflation high for longer,” Stovall said.
Distorted demand and worker shortages
“Inflation is primarily caused by excessive demand chasing too few goods,” said David Dollar, a senior fellow at the Brookings Institution.
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.
“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 contributor 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.
“It would certainly be smart to remove the tariffs now,” Dollar said. “They don’t meet any targets and American households pay for them.”