But nobody’s popping the champagne just yet. While gas prices have played a large role in the current bout of historic inflation, analysts warn that a number of factors remain that will keep overall prices from falling any time soon.
“Russia-Ukraine is a factor but… we had tight supplies coming into this,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “We’d love to see the conflict in Russia and Ukraine end. But I think we still are faced with a global economy that is short of oil in the near term.”
One other factor is the hesitancy of US producers to sink big money into extracting and — more critically — refining fossil fuels when long-term policy goals suggest diminishing returns in the face of a shift to renewable energy.
“There is a structural problem with the oil and gas industry and that has to do with refining capability,” said Jeff Klearman, portfolio manager at ETF company GraniteShares. “Oil companies, not just in the United States but globally, have not expanded refining capacity. That continues to pressure gas prices.”
Peter McNally, global sector lead for industrials, materials and energy at investment firm Third Bridge, said there was “misunderstood criticism” of refiners’ swelling profits, pointing to investments being made to convert existing refining facilities to process biofuels. “These companies are investing for the energy transition,” he said.
Housing keeps getting pricier
“Prices for housing will likely remain elevated and in a sense, keep high inflation higher for longer,” Stovall said.
Warped demand and worker shortages
“Inflation is primarily caused by excessive demand chasing too few goods,” said David Dollar, senior fellow at the Brookings Institution.
This demand ran headlong into factory shutdowns in China, triggering cascading maritime traffic jams at Pacific ports. When vessels docked, there weren’t enough workers to unload the cargo or drive the trucks that would transport it first to warehouses, then to consumers.
“The overall demand for merchandise went up quite dramatically, so we were suddenly asking our system to handle a lot more stuff,” Dollar said. The result was chaos, and a sudden clamoring for workers — at any price.
“The lack of truckers reflects [that] we need more workers than we actually have, and that’s being resolved through higher wages,” Haworth said. As of June, there were more than three-quarters of a million additional workers in the transportation and warehousing sectors than before the pandemic.
Salaries and stimulus
Economists expect wage gains, which have been hovering at just above 5% on an annualized basis, to moderate through the rest of the year. But employers are still facing an acute shortage of workers, putting pressure on businesses to offer competitive salaries to attract and retain talent.
“What we’re not yet clear about is, what is the new post-pandemic normal when it comes to demand? For now, it looks like wage pressures are here for a bit,” Haworth said.
That’s because unlike supply-chain snarls or even whipsawing commodity prices, inflation that creeps into wages is not easily undone. Even if companies can pay less for components or raw materials, they are unlikely to implement pay cuts, so inflation lingers.
“It’s highly correlated to wage growth. That’s not to say higher wages are a bad thing,” Haworth said. “When people have more money, they can buy more things. But if there’s not actually more things, prices go up. Ultimately, that does translate into some pressure for prices on everything else.”
Recent wage gains are coming on the heels of fiscal and monetary policies that contributed to an economy awash in liquidity as a result of stimulus payments to individuals and businesses, as well as quantitative easing by the Federal Reserve.
“They injected a ton of money into the system,” Klearman said. Like higher wages, all this cash — and too few goods to spend it on — is another contributor to price hikes consumers are experiencing on everything from cars to camping equipment to cookies.
Light at the end of the tunnel?
Despite expectations that inflation will likely stick around into 2023, there are some bright spots.
In addition to paying less to commute and run errands, Stovall says high-flying airfares could come back down to earth, and supermarket shoppers could see some grocery costs fall slightly if producers or distributors don’t have to pay as much for transportation in order to get their goods onto shelves. “You could start to see some food price competition start to enter the marketplace as the cost of transportation input starts to come down,” he said.
“It would certainly be smart to remove the tariffs now,” Dollar said. “They’re not meeting any objectives and they’re being paid for by American households.”