While the eye-watering surge in prices for durable goods has powered U.S. inflation higher in recent months, the latest CPI report for December suggests upward pressure on prices is no longer contained to just stuff, but services, too.
Beneath the headline inflation rate, which hit a 40-year high of 7 per cent last month, durable goods saw another spike, driven by supply chain bottlenecks and the pandemic shift in demand from services such as restaurant dining and haircuts, to goods such as electronics and vehicles. Case in point: used car and truck prices soared 37 per cent over the year before.
But as the pandemic subsided late last year, albeit before the rise of Omicron, demand started to swing back from goods to services, and with it inflation crept back into services prices. (The chart includes the two-year change in goods and services prices to avoid what economists call “base effects,” or comparing prices now against a period one year ago when prices were unusually depressed.)
Personal care services in particular came under price pressure. Haircuts were up 4.2-per-cent year-over-year, laundry and dry cleaning services jumped 8.4 per cent while other personal services climbed 4.3 per cent. Even pet-services inflation quickened with the cost of grooming Fluffy rising by 5.7 per cent, its fastest pace in 10 years.
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Durable goods prices are flexible and are expected to come back to earth as the recovery takes hold this year. Prices in services are slower to change, however, meaning inflation in services tends to be sticky. While Omicron’s effect on the service sector remains a big unknown, U.S. labour shortages and rising wages in the private service sector could make inflation a lingering problem for both households and American central bankers.
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Jason Kirby