Analysts forecast proving wrong

Mass vaccinations were supposed to spur a major shift in spending away from goods, toward services. The thinking was that as more people traveled, dined out and attended entertainment venues, the less they would spend on merchandise. That would, in turn, help remove some of the strains on the supply chain., but that didn’t happen.

In part because the delta wave of the virus kept massive pent-up demand skewed toward merchandise and added further strain to supply chains.

Jobs

Another basic assumption was that as the pandemic receded and schools returned to in-person learning — freeing up home-bound parents — millions more Americans than have done would return to the job market. More workers would mean fewer bottlenecks and more supply, validating the “transitory” predictions for high inflation. The bitter reality is as of October, the participation rate, which measures those employed or looking for work, has recovered less than half of its pandemic-related collapse. 

Energy

With the fossil fuel industry having cut back investment over the years, in part amid pressure from tilt toward ESG investing and in part thanks to having over-invested in the previous cycle, energy companies haven’t been able to meet rising global demand. Labor shortages have only made things worse. This led to energy prices rising 30% from a year earlier, the largest annual advance since 2005. Gasoline is up nearly 50%. The price of electricity in October increased 6.5% from the same month a year ago, the most since March 2009.

Pricing-Power

Global competition and consumer expectations for stable prices had long eroded companies’ ability to pass along higher costs. There was no US inflation surge during the escalating tariff hikes with China, for example. But that’s all changed. Large companies have pushed through price increases after having to boost wages to lure workers, along with pay for higher input costs.

Forecasting inflation “has been incredibly challenging,” says Matthew Luzzetti, Chief US economist at Deutsche Bank AG. “And risks remain skewed to the upside for the inflation outlook.”

The Federal Reserve has been off in its forecasts just like everyone else, and will need to reassess next month, when policy makers update their projections.

Credit, though, to Lawrence Summers and Mohamed El-Erian, both contributors to Bloomberg, who have been warning of a prices problem for a while.