3 reasons for inflation that have nothing to do with higher wages
Rising wages sparked some concerns that higher pay for workers will translate to higher prices. Reality isn't so clear-cut. A handful of other factors are playing a much larger role in lifting prices across the US.
The Federal Reserve and the Biden administration argue the overshoot is temporary and linked to the economic reopening. The thesis has, so far, held up. The latest inflation data shows price growth easing in July. And products that were lifting inflation the most saw price growth come to a standstill.
All the while, businesses continued to lift wages as the worker shortage lingered. Decade-high inflation, then, isn't just a product of higher pay.
Here are three trends lifting inflation that aren't connected to rising wages.
1. Shipping prices
Reopening saw Americans almost immediately flood the economy with spending. Producers, on the other hand, faced a bevy of hurdles as they rushed to service the wave of new demand.
Supply chains were still healing from the pandemic, leading to record-high delays in production materials. As businesses competed over a limited pool of goods, shipping prices skyrocketed.
"Supply chain continues to be extremely challenging in a variety of categories. Having to place orders months ahead of time just to get a place in line," one manufacturing-sector manager told the Institute for Supply Management in a July report.
Those higher shipping costs have mostly been passed on to consumers and propped up inflation through the year. For example, where toy manufacturer Viahart used to pay $16,300 to send a container from China to Texas, the same shipment now costs $21,000, according to Time. Because of that increase, the cost of shipping one of its plush giraffes has climbed to $13 from just $3.
2. Profit pressures
Lingering uncertainties among investors and business owners around the pandemic's future have also lifted prices. The Delta variant of COVID-19 has driven case counts sharply higher in recent weeks and plunged the country into yet another wave of virus hospitalizations, even with half of the population vaccinated.
Small-business owners already worry the variant will hinder the economic recovery. Only 39% expect economic conditions to improve over the next year, Insider's Ayelet Sheffey reported. That's down from 50% in July and 67% in March, when vaccines had just started to roll out.
Roughly 22% of owners said their revenue had already been affected by the rise in cases, and another 22% expect their revenue to take a hit soon.
Viahart is among the firms already raising prices to counter concerns of a future slump. The cost of its plush giraffe rose $10 on profit fears alone, Time reported. Those kinds of cost bumps could proliferate throughout the economy as case counts climb higher and officials reinstate some restrictions to slow the virus's spread.
3. Shortages
Some of the inflationary surge comes from the simplest rules of economics: supply and demand. Specifically, too little of the former and too much of the latter.
As Americans got back to spending, there just weren't enough products to go around. Shortages of key materials like lumber and semiconductors hampered activity, and sellers raised prices to make the most of the imbalance. Bottlenecks in supply chains were also "larger than expected" and contributed to stronger inflation, Fed Chair Jerome Powell said in a July 28 press conference.
"As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly because supply bottlenecks in some sectors have limited how quickly production can respond in the near term," Powell said, adding such constraints will dictate how quickly supply can adjust and when inflation cools.
This article was written by Ben Winck from Business Insider and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.
