Monday, October 25, 2021
Friday, October 15, 2021
At Times Like These, Inflation Isn’t All Bad Inflation might be part of the solution for an economy undergoing a complex transition
https://www.wsj.com/articles/at-times-like-these-inflation-isnt-all-bad-11634290202 By
The jump in inflation that the Covid crisis has brought on might not be as transitory as many have hoped. But for the economy to smoothly adjust to a post-pandemic future, higher prices could be necessary.
Covid-related shortages have driven prices for all kinds of things sharply higher, something more than evident in last Wednesday’s inflation report from the Labor Department, much less a trip to the store. The global semiconductor shortage has slowed production of cars, for example, and new vehicle prices last month were up 8.7% from a year earlier, the inflation report showed. Supply-chain snarls have helped push prices for furniture 11.2% higher.
The consensus is that many of these shortages will ease over the next several months. Semiconductor supplies will ramp back up. An increase in vaccinations globally will help bring Covid under control, reducing pandemic-related shipping and production snarls, like those that recently hit Vietnam. In his press conference following last month’s Federal Reserve meeting, Fed Chairman Jerome Powell said that while the effects of supply bottlenecks “are prominent for now, they will abate.”
Yet what is happening with prices isn’t just about supply, but demand, too. The pandemic has brought about changes in what we want to spend our money on and where we want to live and work that could prove persistent. Appliance prices aren’t up just because of supply snarls, for example, but because the Covid crisis increased the appeal of suburban living. So even if supply chains get fixed, demand could still be hard to meet, with prices continuing to rise as a result.
One of the clearest economic changes the pandemic brought on was a massive increase in demand for goods, versus services. At first, this seemed entirely temporary: People were buying more stuff like videogame consoles and groceries because they were hunkered down at home. But even though the vaccine rollout and the easing of Covid restrictions has increased demand for services such as restaurant meals, demand for goods has shown staying power. In the second quarter of this year, consumer spending on goods was 18% higher than in the fourth quarter of 2019, after adjusting for inflation. Consumer spending on services was 3.4% lower.
That change in preferences is helping drive a divergence in inflation as well. Wednesday’s inflation report showed prices for consumer goods were up 9.1% from a year earlier, while services prices were up 3.2%.
There is obviously scope for services to gain back ground if Covid loosens its grip. Even so, the share of spending devoted to goods may stay larger than before. If more people keep working from home some of the time, for example, they will spend less money at lunch joints near their offices, and more on groceries.
Similarly, if businesses continue to hold many client meetings virtually, they will spend less on travel, and more on tech equipment. Personal-computer makers are betting that a higher number of workers will need more than one computer as a result of remote-work arrangements, translating into higher PC demand post-pandemic.
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Geographic shifts in demand matter, too. More people moving to the suburbs or smaller cities, and people who live in the suburbs working from home more often, could equate to more demand that suburban and smaller-city businesses need to meet. There does appear to be a divergence in what is happening with prices depending on population size: Overall consumer prices in areas with over 2.5 million people were up 4.8% from a year earlier in September, while prices in areas with 2.5 million or fewer people were up 5.9%.
Demand-driven price increases carry an important message to businesses that are benefiting from them: You can make even more money if you can supply more. That entails buying new equipment, opening new locations and, most important, hiring additional workers. Meanwhile, businesses that experience weaker demand often can’t lower prices, in part because cutting worker wages isn’t feasible.
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In work she presented at the Fed’s annual conference in Jackson Hole, Wyo., in August, economist Veronica Guerrieri and her co-authors argue that inflation can help facilitate the economy’s response to shifts like the current one because it encourages expansion where demand is rising. It also helps draw workers away from moribund businesses where wages aren’t rising because inflation is cutting into how much those workers’ paychecks can buy.
For Fed policy makers, it could amount to a dilemma. On the one hand, they don’t want too-high inflation to become ingrained in the economy, and that counts as an argument for raising rates next year if inflation doesn’t cool down. But on the other hand, if inflation is helping lubricate the economy to make necessary adjustments, maybe they should accept a bit more of it than they otherwise might.
Write to Justin Lahart at justin.lahart@wsj.com
Corrections & Amplifications
In the second quarter of this year, consumer spending on goods was 18% higher than in the fourth quarter of 2019, after adjusting for inflation. An earlier version of this article incorrectly said it was 18% higher than in the fourth quarter of last year. (Corrected on Oct. 15)https://www.wsj.com/articles/at-times-like-these-inflation-isnt-all-bad-11634290202
Wednesday, October 6, 2021
US shale drillers cannot contain oil price rise, Pioneer boss says
US shale drillers cannot contain oil price rise, Pioneer boss says Scott Sheffield says ‘it’s really under Opec control’ after crude reaches $80 a barrel Pioneer Natural Resources, led by chief executive Scott Sheffield, is the Permian Basin’s biggest single oil producer with output of almost 360,000 barrels a day © Bloomberg Share on twitter (opens new window) Share on facebook (opens new window) Share on linkedin (opens new window) Save Derek Brower in New York and David Sheppard in London OCTOBER 3 2021 82 Print this page US oil producers are not able to increase supply to tame soaring crude prices that remain “under Opec control”, according to the shale patch’s biggest operator. Brent crude jumped to a three-year price high above $80 a barrel last week, sparking fears of a deepening global energy crunch that has already pushed natural gas and coal prices in Europe and Asia to record highs. But Scott Sheffield, chief executive of Texas-based Pioneer Natural Resources, said America’s once-prolific shale producers would keep using their burgeoning cash piles to pay shareholders, not fund new drilling. “Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,” Sheffield said. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.” “I don’t think the world can rely much on US shale,” he said. “It’s really under Opec control.” Pioneer bought two rival Texas producers this year, making it the prolific Permian Basin’s biggest single oil producer with output of almost 360,000 barrels a day — more than some of the smaller member countries of the Opec oil cartel. It has said it will cap any output increase next year at 5 per cent, well beneath the double-digit rates of previous years. Twice weekly newsletter Energy is the world’s indispensable business and Energy Source is its newsletter. Every Tuesday and Thursday, direct to your inbox, Energy Source brings you essential news, forward-thinking analysis and insider intelligence. Sign up here. The Pioneer chief’s comments come as the US government puts pressure on Saudi Arabia, Opec’s de facto leader, to increase crude supply to keep further energy price inflation in check. The expanded Opec+ alliance, which also includes allies such as Russia, will meet on Monday to decide whether to maintain output targets. The group last year agreed deep production cuts to restore crude prices that plunged as pandemic lockdowns hit energy consumption. But supplies are now short of demand as economies recover, with global crude stockpiles shrinking at a record pace, according to Goldman Sachs. Last week the bank raised its end-of-year Brent forecast from $80 to $90 a barrel. On Friday, Brent settled at $79.28. Some analysts say that the gas crunch hitting Europe and Asia could spill into markets for liquid fuels, pushing up demand for crude this winter as industries burn more oil to generate electricity. Opec+ agreed in July to add back 400,000 b/d each month until the end of 2022, but some analysts say that supplies must rise more quickly to staunch further price inflation. US national security adviser Jake Sullivan discussed oil prices with Mohammed bin Salman, Saudi Arabia’s crown prince, last week, according to the White House. Sheffield said that while the Biden administration was calling on Opec to increase supplies, it was trying “to slow down US drilling in any way they can” through moves such as a moratorium on leasing federal lands for drilling. “They’d rather import crude oil from Opec,” he said. Recommended News in-depthOil US oil output to climb again despite restraint of big shale drillers Soaring shale production in the past decade made the US the world’s biggest crude producer, pumping almost 13m barrels of crude a day in late 2019. But years of debt-fuelled drilling exhausted some fields, say operators, and angered investors, leaving the sector vulnerable when the pandemic struck in 2020. The price collapse forced producers to slash capital spending and idle rigs. Drilling activity has begun to pick up — leading some analysts to predict modestly increasing output — but production remains almost 15 per cent below the pre-pandemic peak. Sheffield said the dealmaking in the Permian would also temper producers’ responses to rising prices. “There’s only four or five companies that have core (acreage),” and shale would never again hit the annual growth of around 1.5m b/d seen in previous years, he said. “Maybe a million, at top, for a couple of years,” Sheffield said.