April 2023 NC Economy Watch: The Inflation Sensation That Rocked the Nation

Welcome to the April 2023 edition of NC Economy Watch: an update on what’s happening in the North Carolina economy and what it means for you, brought to you by the Labor & Economic Analysis Division (LEAD) of the NC Department of Commerce.

In this edition of NC Economy Watch we examine rising prices in our region and nationwide. Price inflation remains stuck at decades-high levels, causing hardship for consumers and threatening to tip our economy into recession. While it’s difficult to predict how the future course of inflation will evolve, price growth is likely to remain elevated due in part to a shortage of available workers.

The Inflation Sensation That Rocked the Nation

It’s hard to spend money on anything these days without experiencing sticker shock. From the price of food to the cost of medical care, consumers accustomed to low rates of inflation are having to grapple with increases unseen since the 1980s.

Inflation skyrocketed in 2021 as a deluge of consumer demand collided with a shallow labor pool and an overwhelmed supply chain, leading to price increases and widespread shortages of goods and services. These price increases were exacerbated by international trade disruptions resulting from Russia’s invasion of Ukraine in early 2022. Over-the-year consumer price growth in the United States surged from under 2% in January 2021 to over 9% in June 2022 [Figure 1]. Inflation has been even more intense in the South Atlantic region, which includes North Carolina, due to our red-hot housing market.[1] Price growth has eased somewhat in recent months, but it remains stuck at decades-high levels.

Figure 1

The nature of today’s inflation isn’t quite the same as the inflation of a year ago. Back in February 2022, transportation constituted the single largest contributor to price inflation, driven by manufactured goods like motor vehicles and globally traded commodities like gasoline [Figure 2]. Now, the rising cost of housing has emerged as the primary driver of price inflation, although other categories of spending such as food and medical care are also experiencing persistent inflationary pressures.

Figure 2

Unfortunately, prices don’t follow the law of gravity; once they go up, they don’t necessarily come back down. While the future course of inflation is difficult to predict, the pace of price increases is likely to remain elevated due to the same factors that kicked off our current spell of inflation in the first place: our economy lacks the productive capacity to deliver the goods and services that consumers demand. One especially notable chokepoint is a shortage of available workers, causing wage increases that, in turn, raise cost pressures on businesses while simultaneously fueling ever-higher levels of consumer demand.

The international trade and supply chain disruptions that contributed to inflation in 2021 and 2022 are gradually abating, but wage growth shows few signs of slowing down. While many economists expect housing inflation to decline later this year, rising wages might serve to keep demand high, leading to further growth in housing costs. The Federal Reserve is focused on sectors of our economy that are struggling with labor shortages and for which wages make up the bulk of their cost structure, such as businesses that provide non-energy, non-housing services. Although the labor market has cooled somewhat over the past year, nationwide wage growth remains near a multi-decade high, and many businesses in the Carolinas continue to raise wages [Figure 3].

Figure 3

Not a single person in our state is left untouched by inflation, and rising prices are intermingled with every aspect of our volatile pandemic-era economy. A record-tight labor market has led to rapid wage gains. These wage gains have led to price increases and a higher cost of living, leaving many wage-earners worse off despite their larger paychecks. The Federal Reserve is raising interest rates to fight inflation. Higher interest rates make it more expensive for individuals and businesses to borrow money, leading to slower economic growth and heightening the risk of a recession. This is why inflation is arguably the most important trend in our economy and one we will continue to follow closely in the months ahead.

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