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Post-Pandemic Problem: All Signs Point to Inflation

All signs point to inflation ahead as economic growth ratchets up and ongoing supply-chain woes strangle supply.

America’s economic growth this year could reach 7.0 percent, the second-fastest annual growth rate since 1955, and just slightly trailing 1984’s 7.2 percent. However, Wells Fargo economists believe the good news also comes with challenges.

Longer lead times, lack of available labor and supply chain constraints are driving shortages in everything from microchips and two-by-fours at the lumber yard to even chicken wings. In fact, the biggest surge in activity is likely still on the horizon. In the meantime, scarcities mean raw materials costs are through the roof. And if not for “logjams in the supply chains,” economists believe the GDP could have climbed higher—and faster.

This development marks a stunning change from 2020’s collapse in demand amid global coronavirus lockdowns and whiplash upheaval in consumer spending. Fast forward to 2021 and now supply is the problem. Lack of raw materials to make goods, shipment backlogs stemming from container shortages, plus a labor crunch leaving many jobs unfilled are also seen worsening in the months ahead.

Now, vaccines are encouraging consumers to heading back into stores, some armed with federal stimulus money or the savings they’ve stockpiled over the past year.

Despite the “seismic” shift anticipated for renewed spending on services like travel and events, economists believe consumers have runway to continue spending on durable goods.

“Demand for retail space has gotten a short-term reprieve, as consumers flush with cash are venturing out to brick-and-mortar stores, the Wells Fargo team said. “The bump will likely prove short-lived, however, and we expect the longer-term shift to online retailing to remain in place, fueling demand for warehouse and distribution space.” The team expects consumer activity to continue its strong pace through the second quarter before dipping slightly in the third.

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However, supply bottlenecks coupled with surging demand typically spells rising inflation. The Wells Fargo economists upwardly revised their core PCE (personal consumption expenditures) inflation to between 2.4 to 2.7 percent on a year-over-year basis over the next five quarters. The Federal Reserve expects inflation to overshoot its 2 percent target, but would likely hold interest rates to prop up the sagging labor market. Moreover, the “ongoing rise in food prices suggests that solid clip of food inflation over the past year is not about to let up anytime soon,” they said.

The Wells Fargo team said current pressures could leave the pace at an elevated level in 2021. While inflation could slow toward the end of 2022, core PCE inflation is expected to remain above 2.0 percent for the next several quarters.