For most of the past quarter century, the twin forces of globalization and technological progress have pounded down inflation for durable goods, keeping a lid on prices for things such as vehicles, furniture, home appliances and sporting equipment.
That’s sent each country’s consumer price index for durables, which are adjusted to account for product quality improvements over time, to levels not seen since the early 2000s, and not far off their mid-1990s peaks. Rising commodity prices are also a factor. Energy prices are up 50 per cent since the start of the pandemic, while metals and minerals have doubled, the Bank of Canada’s commodity price index shows. Wildly-volatile lumber prices have also shown up in furniture sticker shock.
With wait times for new vehicles stretching into months, and some automakers refusing to accept new orders for certain 2022 models, pent-up demand is building. “In Canada and the U.S. alone there were at least two million vehicles people and businesses wanted to buy but couldn’t last year,” Ms. Young said. That’s on top of fresh auto demand in 2022 that’s forecasted to be at pre-COVID levels.
Inflation expectations are also a powerful driver of consumer purchases of durable goods. If people think the price of something is going to go up, they’re more likely to scramble to buy that item. In the case of college-educated American households, a single percentage point increase in one-year inflation expectations translates into an immediate 19-per-cent jump in spending on durable goods, according to recent research from the Federal Reserve Bank of Boston.
“We were already seeing some upward pressure on prices before the pandemic as globalization hit its ceiling,” said Sarah House, an economist at Wells Fargo Securities. “We don’t think there’s going to be a reversion to that persistent deflationary trend in durable goods prices.” As part of that rethink, some companies are bringing parts of their supply chains closer to home, a phenomenon known as near-shoring. Others plan to maintain higher inventories to avoid being caught out in future crises. “If those were cheaper avenues, businesses would be doing that already,” Ms. House said. “These things all come with a cost.”
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