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The Inflation Bubble is Ready to Burst

Inflation has likely hit its peak in the U.S. At least according to some economists.

That easing is largely thanks to shoppers shifting spending from on goods to spending on services. After a year spent trapped at home by commercial sector shutdowns, consumers are splurging on airfare, eating out and going to the movies.

Due to these behavioral shifts, economists project that the nation has hit its inflationary peak, and stands to see a decline in the coming months. However, price increases are unlikely to roll back to the Federal Reserve’s target rate of 2 percent before 2022, S&P Global Market Intelligence revealed in a report this week. That’s partly because when it comes to physical products, supply and demand are still far from being aligned.

As consumers furiously clicked “buy” on goods like apparel and footwear, home improvement products and furniture beginning last fall, brands and retailers found themselves struggling to import enough goods to satiate returning appetites. Pressures mounted, causing supply chain slowdowns and shipping delays that persist this summer. The road to a full resolution of those backlogs may be long, experts say.

In June, the headline consumer price index rose 5.4 percent (4.5 percent excluding fluctuations in food and energy). The figure represents the largest increase since 1991, as consumers have clamored to purchase products like cars, apparel and other commodities, for which availability has been slowly rising in recent months. The index for apparel increased 0.7 percent in June, Federal Reserve data shows, following a 1.2-percent rise in May.

While consumers are still evincing an eagerness to purchase products, they’re now diverting dollars to other areas, as well. The quantity of goods being purchased by shoppers has actually contracted for two months in a row, S&P noted, with the personal expenditure on durable goods shrinking by 4.3 percent month over month in May. The quantity of services being consumed, however, is on an upward trajectory.

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“As the economy continues to reopen, allowing consumers to spend their money on services, there will be less upward pressure on the price of goods, easing the inflationary bubbles that have appeared,” S&P analysts wrote.

It may take time for changes to appear at retail, according to a poll conducted by 451 Research of 606 U.S. businesses. One-third of respondents said they were continuing to raise prices, compared with just 4 percent that said prices were falling. Retail leads the pack, with 44 percent of brands and retailers copping to upping prices, while the manufacturing sector follows closely behind at 41 percent.

Supply chain bottlenecks remain a concern, S&P analysts noted, as new Covid outbreaks in Taiwan threaten industry in the area. In June, global logistics advisory firm Gartner told Sourcing Journal that shipment delays and container shortages could impede global trade through Chinese New Year, with continued outbreaks across the globe likely to impact ports across the globe this fall. In March, the six-day blockage of the Suez Canal by a massive cargo ship tied up as much as 15 percent of the world’s container capacity, authorities said at the time, causing shipping prices to skyrocket. In late May, an outbreak in Southern China shuttered the country’s third-busiest port, Yantian, for a week, and hobbled operations there for nearly a month afterward, upping pricing pressures.

With few safeguards against these kinds of disruptions, importers across categories could face continued challenges bringing in product to meet shopper demand, especially during the peak shipping season of August through October. Logistics prices are likely to reflect heightened demand—and brands may opt to pass those costs along to the consumer.

Gregory Daco, chief U.S. economist at Oxford Economics told S&P that while the current moment represents an economic “inflection point,” the country stands to see some “stickiness” around inflation that will begin to moderate in early 2022. Meanwhile, ING chief international economist James Knightley told the group that inflation could remain “well above” the Fed’s 2 percent target for years.

“Given the strength in demand, I am worried that there is broader scarring in the economy,” he added. “This may limit the economy’s ability to fulfill that demand.”