People are still spending their stimulus money

The last two years have seen an unprecedented $5 trillion sent directly to US citizens and businesses in order to keep families from starving and businesses from closing while states ordered people to stay at home. At the same time, the Fed kept interest rates at practically zero, making it cheaper and easier than it had been in years to borrow money for things like a house or a car. Thanks to additional social programs like the child tax credit, financial cushions are more stable than ever for more people. The result? There’s more money in the system and consumers have done what they do best — buy stuff, price and supply chain be damned. “Demand across the economy recovered a lot faster than most households and businesses anticipated,” said Joel Prakken, Chief US Economist for IHS Markit.

On the other side of the supply-and-demand equation, corporate America has also had a role in rising prices. Public companies had one of its best earnings seasons ever last quarter, boosted not only by the stimulus money that’s leaving customers’ accounts, but by the subsidies that came directly from the government for the businesses. That gave them the leeway to raise prices – even on products that weren’t facing supply chain problems. “It does put sellers in the driver’s seat in terms of being able to raise prices without fear of losing market share,” Prakken said. While companies are preparing to use some of that money to raise workers’ pay next year, any wage gains will probably come as the Fed cools down the economy. Powell has signaled that he’s ending a massive market stimulus program, where the central bank purchases debt. After that, the central bank is likely to start raising interest rates, making it more expensive to borrow money for a home or a car, or even just to carry a balance on a credit card. That, of course, tends to tamp down demand and cool inflation. But higher rates affect consumers to – so even if prices now are higher than normal, it might still be a good time to buy.