Prices are Spiking for Homes, Cars and Gas; Don’t Be Alarmed, Economists Say

By Edward Lempinen| JUNE 10, 2021

The cost of homes is soaring — and so is the cost of the lumber to build them. The price of cars and gas are up sharply, too, as are prices for products ranging from corn to computer chips. Now worries are rising that as the post-pandemic economy comes back to life, a sustained surge of inflation could undermine the recovery.

The US Department of Labor reported ... that the Consumer Price Index rose 5% in May, following a 4.2% jump in April. But at UC Berkeley, high-level economists are offering some calming advice: A measure of inflation is inevitable as the US economy comes back online, but it will likely be modest. And it will almost certainly blow over as the economy stabilizes.

“Alarmists point to past periods of very high inflation, so we imagine inflation of 5%, 6%, maybe higher,” said Berkeley professor Maurice Obstfeld (right), former chief economist for the International Monetary Fund. “But I don’t think it’s very likely that we would get much above 3% after a couple of years.”

“People have this idea that inflation is something we have to be frightened about,” added Berkeley economist Yuriy Gorodnichenko. “When we have some inflation, that means we have a lot of action in the economy, and the economy is recovering. It’s good. It’s a sign of health. … It doesn’t mean we’ll return to the 1970s.”

Yuriy Gorodnichenko (right)

The UC Berkeley economics department features some of the nation’s most influential scholars in monetary and economic policy, many of them with experience at high levels of government, international institutions and academic centers. In a series of interviews, they cited a range of challenges as policymakers try to restore some normalcy to the economy — continuing high unemployment, for example, and an economic realignment away from brick-and-mortar retail stores.

Inflation forecasts are inherently uncertain, but they said today’s higher prices are likely to be a blip that lasts a year or two, at most.

The new inflation numbers are roughly double the annual inflation rate of the past decade, but far below inflation that averaged 7.9% annually in the 1970s, before peaking at nearly 14% in 1980.

That inflation caused deep, long-term damage to the U.S. economy. Tens of millions of Americans saw dramatic erosion in the value of their earnings and savings. Businesses faced price increases and broad uncertainty that made it difficult to budget for the costs of supplies and labor. Unemployment rose and stayed high for years.

Without doubt, the 1970s economy left scars that remain painful four decades later — and, the Berkeley scholars say, that likely accounts for some of the alarm in recent weeks.

Waking the economy from an induced coma

For generations, Econ 101 students have learned that inflation is a straightforward process: When an economy is strong, a lot of people are working, and their wages are rising. That means more people with more money are competing to buy apples or pickup trucks or homes. The competition causes price inflation.

construction workers on ladders building the frame of a house

New housing construction in the US has lagged for years, but during the pandemic, lumber shortages and rising demand for new homes have driven a spike in prices, economists say. (Photo by the National Institute for Occupational Safety and Health via Wikimedia Commons)

But the economic conditions caused by the pandemic have been unlike anything in modern U.S. history. In effect, the lockdown put much of the economy in an induced coma so that, where possible, workers would stay home and be protected from the coronavirus.

Brad DeLong (UC Berkeley photo)

The lockdown saved thousands of lives, and government relief programs prevented mass poverty. Still, restaurants, tourism and retail sales took a massive hit. Rental car companies sold off their fleets, rather than let vehicles sit idle. Microchip manufacturers reduced production. Housing starts plunged. Hundreds of thousands of businesses reduced or suspend operations, which meant reduced hours or furloughs for millions of workers. Other businesses closed permanently.

As more Americans get vaccinated and health threats retreat, it would seem simple to flip the switch and turn the economy back on, said Berkeley economist J. Bradford DeLong, who served as deputy assistant Treasury secretary in the administration of President Bill Clinton.

“You give people lots of purchasing power, and you say, ‘Go out and spend it,’” DeLong explained. “And if there are lots of people running around waving money in the air saying, ‘I want to buy things,’ businesses will respond, and you will get back to full employment quite quickly.”

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Prices are Spiking for Homes, Cars and Gas; Don’t Be Alarmed, Economists Say

By Edward Lempinen| JUNE 10, 2021

Waking the economy from an induced coma

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