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The three forces driving inflation higher and what it will take to cool them off

Sharply rising labor costs, energy prices and interest rates are driving inflation higher, experts say.
Apples are stacked for display at a grocery store in Monterey Park, Calif., on April 12, 2022.

A grocery store in Monterey Park, Calif. More demand for fewer available goods is leading to higher prices, Fed Chairman Jerome Powell has said.Frederic J. Brown / AFP – Getty Images

April 19, 2022, 8:05 AM PDT

If you’re looking for the day-to-day items on your shopping list to come down in price, you may be waiting awhile.

Data released last week by the Bureau of Labor Statistics showed that inflation had climbed 8.5 percent in March compared to a year ago — the largest increase since 1981. There were gains nearly across the board, with energy, shelter and food prices all soaring at record rates.

And while consumers across the economic spectrum are feeling the pinch, accelerated inflation tends to squeeze low- and fixed-income earners the most. Richard Curtin, director of the University of Michigan’s Consumer Sentiment surveys, says his data shows that the “pain” of inflation has touched every corner of the U.S. economy.

“You have to eat, you have to drive to work and take the kids to school, and you have to live somewhere. These aren’t discretionary areas,” Curtin said, adding that consumers are looking for other places where they have room to cut their expenses.

“It’s painful,” he said.

Experts say there are three main factors currently fueling much of the price growth: sharply rising labor costs, energy prices and interest rates. Each one pushes the cost of everyday consumer goods higher, and it will take a complex set of forces to return to pre-pandemic normal.

Rising wages

The legion of workers leaving their jobs, especially those in low-wage sectors, has played an enormous role in the rising cost of labor, said Jayson Lusk, a professor and the head of agricultural economics at Purdue University.

“To get enough workers to show up now, you need to pay more, so we’re seeing rising wage rates throughout many food and agricultural sectors,” Lusk said.

Lusk cited the wages now being paid to meat processors, which according to BLS data have climbed 8.3 percent from the third quarter of 2020 and the third quarter of 2021, as an example of accelerating wage growth in the food industry.

Overall, BLS data show, U.S. employment costs have accelerated in three of the last six quarters, and at levels well above pre-pandemic trends. Economists had expected a waning pandemic and relaxed Covid-era restrictions to prompt the return of more workers to the labor force, but that is not happening as fast as anticipated, Lusk said.

“The labor market needs to get sorted out; you need a solution to the Great Resignation problem,” he said. “There’s no normalcy until that occurs.”

The timeline for that is anything but clear, however. Respondents to a November 2021 survey by the Federal Reserve Bank of Philadelphia said they generally expect payroll growth to remain high in 2022.

“If these forecasts are correct, the job openings and quits rates are likely to remain elevated and wage growth is likely to remain strong for the rest of the year,” according to Bart Hobijn at the Federal Reserve Bank of San Francisco, who wrote the bank’s economic letter this month.