Tighter labour markets should lead to higher inflation. But the faster the labor market recovers, the lower inflationary pressures will be, at least in the coming months.

The Labor Department said Wednesday that consumer prices rose 0.4 percent in February from January due to higher gasoline prices. Excluding food and energy – the so-called core figure that economists use to better track inflation trends – prices rose just 0.1 percent month-on-month. A year earlier, total prices rose 1.7% and core prices 1.3%.

So there is not much inflation, but that is about to change. For starters, the year-to-year comparisons are close to the early days of the Covid 19 crisis, when prices were falling. But that’s not all. With vaccinations looming and a new round of government bailouts, economists are revising their inflation estimates. Forecasters polled by The Wall Street Journal now expect consumer prices, as measured by the Labor Department, to rise 2.8% from June of last year, up from 2.2% six months ago.

A reasonable increase in inflation is likely to come at the cost of simple supply dynamics struggling to keep up with demand. Hopefully, as the pandemic subsides, the demand for services will be met less and less as people go on vacation, fly home to see their families, and eat out again. And with all the savings that many families have amassed over the past year, and which it looks like will be supplemented by another round of government support, there will be money to spend. Commodity prices could also remain firm, according to Morgan Stanley economists, as inventories are low and supply chain issues persist.

The possible trade-off for higher prices for services is mainly that many companies will have an interest in selling as many goods as possible after a terrible year. For example, restaurants can raise their prices when demand is high. Instead of having people line up at the door, look at the time and leave, it would be better if the customers sat down inside the restaurant. Capacity building can therefore be a priority.

A reasonable increase in inflation is likely to come at the expense of simple supply-side dynamics trying to meet demand. Target storefront in Emeryville, CA.


David Paul Morris/Bloomberg News

But in the service sector, the potential is often human. Someone has to make the bed, serve the food, cut the hair and tell the passengers to put away their trays. Companies will have to hire.

There may be limits to how quickly they can do it. Some of these are financial in nature: Until money flows into the Treasury, many small businesses in particular will not attract more people. Some are logistics: Restaurants and bars employed about two million fewer people last month than they did a year earlier, and it will take some time for those numbers to recover. Complex issues, many businesses in the service sector have closed due to the pandemic, so restoring capacity will not be easy.

However, despite the difficulties, the increase in demand is expected to be absorbed by more recruitment, which could ease price pressures, at least in the short term. Otherwise, of course, the story is different. The faster the labor market recovers, the more sustainable inflation is likely to be.

Federal Reserve Chairman Jerome Powell told Nick Timiraos that there are no plans to raise interest rates until labor market conditions peak and inflation remains at 2%. Photo: Eric Baradat/Agence France-Presse/Getty Images.

Email Justin Lahart at [email protected].

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