Yes, the American economy is a consumption economy. And most of what we consume are services such as haircuts, Uber rides and Netflix queues.
Holiday shoppers are experiencing higher prices and lower supplies as they work through their Christmas wish lists. This inflation may catch shoppers off-guard, and it certainly has gotten the attention of investors, the Federal Reserve and Congress.
The scrutiny paid to inflationary trends has been concentrated among the stuff we buy — things like cars, vegetables and bicycles. But don’t ignore the price of services, too. The Fed won’t.
Consumer prices for goods were up 5% in November. That’s excluding the volatile swings of energy and food. Stripping out the price of gas and dinner can help give a clearer picture of longer-term price trends. Five percent is well above the slightly higher than 2% tolerance of the Fed. By contrast, the price of core services was up a more reasonable 3.4%.
The central bank’s favored price gauge will be released on Thursday in the week ahead. The Personal Consumption Expenditures Price Index is a more refined and dynamic method measuring price trends than the better-known Consumer Price Index.
Looking beyond the headline number will be important to suss out the drivers of today’s inflation. Americans have been on a buying binge after the abstemiousness and stimulus of the first year or so of the pandemic. Factories, shippers and others in the supply chain for goods have had difficulty keeping up, and that has led to higher prices on things.
Faster rising prices of services reflects a lack of labor even with rising wages. Wages tend to be stickier than other prices. They usually do not retreat after jumping ahead. Whereas a manufacturer or retailer could cut prices to beat the competition and pick up customers, it works the other way in the fight for workers in the services economy.
