At some point the economy is going to shift its worry from recession to inflation and, by most accounts, that point may be reached later this year. One of the most pressing issues for business is determining when that trend starts to manifest.
One of the factors that will bear scrutiny will be the prices in the service sector. They are already showing some worrisome signs, and it may well be that these will spark inflation more than some of the traditional motivators like commodity prices. In the last few weeks, there have been declines in these prices and, under normal circumstances, that would create some sense of calm when it comes to inflation. That may be a false sense of security given what is happening on the service side—especially given the large role that service plays in the US economy.
The three most aggressive price hikes are showing up in medical services, education and housing. The surge in interest in the housing sector is driving activity in the rental sector, which has propelled some higher rents and higher home prices. This part of the consumer public has been very slow, but it is now starting to speed up.
There are also some reasons to think that the inflation issue will be less dramatic than feared. This assertion is based on the increased payroll tax and the other tax hikes that could take some wind out of the sails of consumers. Reduced spending on restaurants and on other services may restrain some of the price hikes that would have reacted to consumer demand. The commodity impact on inflation will also be watched carefully as it has been a restraint up to this point. The reduction in fuel prices has taken the sting out of service inflation — Nobody knows how long that will last.