Gasoline prices are inching down. Are other prices stabilizing in California?
The big price increases that have pushed inflation to its highest levels in 40 years are likely to ease in California as the year continues, state economists say.
“All of the big increases are coming from certain sectors,” notes Hannah Gabriel, assistant professor of economics at California State University, Sacramento.
Energy is a huge driver of recent price spikes, but gasoline prices have stabilized recently. Supply chains are slowly recovering. Demand for big ticket items such as houses and cars should ease as interest rates go up, which means less incentive by sellers to increase prices.
Mark Schniepp, director of the California Economic Forecast, saw the longer term outlook for lower inflation as bullish.
“Other than crude oil, production of goods will come back. So think about all the production that will occur to replenish needed inventories that are in steady demand,” he said in his April newsletter.
Of course, the experts warn, inflation is historically highly unpredictable, and no one sees a return to the nearly invisible inflation of the 2010s. Consumer behavior is a big driver of whether sellers need to keep prices lower to attract buyers, and recently consumer confidence has been tough to figure.
“There is evidence of consumer resistance to higher prices. They are buying smaller quantities and switching to cheaper brands. Even the tips at restaurants are smaller in percentages,” said Sung won Sohn, president of Los Angeles-based SS Economics, a consulting firm.
Gas prices drop
Experts mention these areas to watch to see if price increases do start to ease:
▪ Gasoline. This is the trickiest, because it’s affected by a host of factors that are difficult to predict. Will other countries compensate for supplies choked off by the Russia-Ukraine war? Will California provide rebates or reduce taxes? Will Washington encourage more domestic production?
This much is obvious at the moment: Gasoline prices have stabilized since Russia invaded Ukraine Feb. 24. A gallon of gasoline averaged $5.69 in California Tuesday, down 15 cents from a month ago.
▪ Consumers. People tend to spend when they’re optimistic about their financial situation. While there were upticks in consumer confidence this month, experts were wary that trend will continue.
“There are still significant sources of economic uncertainty that could easily reverse the April gains, including the impact on the domestic economy from Putin’s war, and the potential impact of new covid variants,” said Richard Curtin, chief economist for the University of Michigan Survey of Consumers.
▪ Supply and demand. “Supply bottlenecks are gradually easing,” said Sohn.
Shortages of goods have been fairly common for months, as industries adjust to a post-COVID-19 world. As supplies become more plentiful, prices are likely to stabilize.
“Everyone says the supply chain issue is a short-run problem,” said Gabriel.
Mark Zandi, chief economist at Moody’s Analytics, estimated that the 8.1% annual rate of inflation reported last month included 5 percentage points driven by the supply bottleneck. He was optimistic the crunch is easing.
“We’re in a better place. We’re not where we need to be, but moving in the right direction,” he said.
▪ Interest rates. Historically, the Federal Reserve tries to ease inflation by raising interest rates. Higher rates dampen demand, and that should push sellers to lower prices.
The Fed raised rates slightly last month, and has signaled more increases are ahead this year. Home mortgage rates averaged above 5% last week for the first time in 11 years.
Even before the increase, California saw a trend. Sales of existing single family homes in March, using a seasonally adjusted annualized rate, were up 0.5% from February and down 4.1% from March 2021. Year-to-date statewide home sales were down 7% in March.
Add up all these factors, said the economists, notably the easing of the supply crunch, and they tend to predict less robust price increases in the months ahead.
“We’re in a better place,” said Zandi. “We’re not where we need to be but moving in the right direction.”
This story was originally published April 21, 2022 at 5:00 AM with the headline "Gasoline prices are inching down. Are other prices stabilizing in California?."
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