The Only "Good" News on Inflation

An often-overlooked part of the inflation story is the role of consumer choices to substitute one type of spending for another and the ability of pandemic-constrained firms to adjust to new spending patterns.

From 2015 through the onset of the pandemic, spending on services as a share of total consumption held consistent— ranging between 67.6% and 69.2%. However, the services share of consumption then cratered through the pandemic, reaching a low of 64.0% in March of this year.

In nominal terms, spending on services is up 2.3% over January 2020 levels, while spending on goods is up an impressive 20.2%. Services spending was constrained over the summer, with the Delta variant throwing a wrench into many people’s travel plans. However, spending on services is expected to recover as case counts drop. Key questions going forward are centered around the labor market's wage requirements relative to rising inflation and the length of time it takes for supply chains to get back on track with structurally higher levels of goods spending.