Our previous commentary spoke about the importance of inflation with regard to the future of interest rates. We follow with a discussion regarding the threat of inflation. First, we must understand that all sectors of the economy do not experience inflation at the same rate. For example, today we see inflation in the housing and energy sectors.
Oil prices averaged just over $40 per barrel in 2020. This year, the price of oil has risen to over $60 per barrel. Though, the energy sector is known for volatility and that is why inflation at the core level is measured without the food and energy components. On the other hand, housing is not a volatile component and house prices have been rising significantly for the past few years. Rising lumber prices and increased demand have fueled this surge. Record low interest rates have lessened the severity of this effect, but as we have said -- interest rates are rising.
Where don’t we see inflation? Wage growth has been steady during the past year, but mostly because most jobs lost last year were at the lower end of the salary scale. Thus, there is room to add plenty of jobs this year without exacerbating inflation. The jobs report released recently showed that the recovery is gaining steam. This is most likely why the Fed has indicated that inflation is likely to pick up in the short-term, but is not a threat in the long-term picture. At least for now.