BUSINESS

'The new normal'? In NJ, higher prices may be here to stay, economists say

Daniel Munoz
NorthJersey.com

With prices rising at their fastest rate in more than four decades, the question is on the mind of every driver, homeowner, shopper and saver in New Jersey: Where will it end?

In the Garden State, gas prices have spiked 44% in the past year. The cost of a new car in the New York metro area jumped 16% in June from a year earlier, according to the U.S. Labor Department. Meat, chicken, fish and eggs climbed 10%. Housing costs were up 4%.

Economists expect the pain to drag on at least through the end of the year. Volatile energy and food prices may come back down, but some of the eye-watering increases are likely here to stay.

Eventually, employers may be forced to hike wages, increasing individual purchasing power to take some of the edge off inflation. But it's looking more and more likely, economists told us, that any "relief" will be triggered by a recession that dries up demand and forces businesses to recalibrate.

Ahmed Benameur, gas station attendant, pumps gas at the Route 4 Exxon station in Paramus, N.J. on Wednesday May 11, 2022.

“Unless the economy really goes in the tank, I don’t think businesses will be inclined to lower the prices,” said Robert Scott, an economist with Monmouth University.

How did we get into this mess? How do we get out of it? Here's what a sample of local and national economic experts told the USA TODAY Network New Jersey:

Are high prices here to stay? 

It's unclear. Wages could eventually catch up with some of the price increases, Scott said.

But that level of wage increase would be a huge cost for businesses to absorb, and it could put “all kinds of financial pressure on companies,” said Tom Bracken, president of the New Jersey Chamber of Commerce.

Wages had been trending upward during the pandemic, as employers looked to lure workers back and overcome a labor shortage. But economists at the Federal Reserve Bank of Dallas and elsewhere have debated whether pandemic-era pay increases actually raised the quality of life for workers, and in any event, inflation has been eroding those gains in recent months. Hourly pay fell 3% between May 2021 and 2022 when inflation is factored in, according to federal data.Chris Hayes, a labor historian at Rutgers University, said worker compensation has been falling behind for decades. A study by the nonpartisan Pew Research Center from 2018 found stagnating wages since the 1960s despite rising costs of living.

“Employers and pro-business politicians and commentators will continue to cite rising wages as a main cause of inflation, selling propaganda to the public that they have a choice between paying people a decent wage or reasonable prices, conveniently removing record profits and profit margins from the equation,” Hayes said.

“Right now, it's very difficult to predict what will happen to prices, whether current prices will become the new normal or they'll go back to lower levels,” added Jill Gonzalez, an analyst with personal financial website WalletHub. 

Is a recession next?

The Labor Department announced last week that consumer inflation rose at a 9.1% annual rate in June, the highest level in more than four decades with increasing energy and food prices pushing prices higher.

Looking to tame inflation, the U.S. Federal Reserve is orchestrating the most rapid series of interest-rate hikes since the late 1980s. But that also has raised fears that the Fed could hit the brakes too hard and send the economy into a contraction — as the central bank did in the early '80s, when it last battled inflation this bad.

A recession would drive up unemployment and shrink spending power, thereby lowering demand and ultimately prices at the store.

The cycle already appears to be playing out, with gasoline prices retreating in recent weeks amid speculation about decreased demand for fuel, according to Hayes. Figures from AAA show that the New Jersey average for a gallon of regular gas was $4.59 on Monday, compared with $5 a month ago.

“Analysts and companies are anticipating a decline in demand, due to economic contraction,” Hayes said. 

In another sign of falling demand, housing prices have leveled off in New Jersey this year as interest rate hikes have increased the cost of a mortgage. According to the New Jersey Association of Realtors, the median home sale price for Bergen County rose 8.3% in May, compared with 12% in February before the Fed started raising rates. 

Why is inflation so high?

The coronavirus, federal stimulus packages and the war in Ukraine all played roles, economists said. 

Pent-up demand coming out of more than a year of pandemic restrictions meant a surge in interest for consumer spending. At the same time, with the virus still active around the world, manufacturers and distribution networks haven't been able to keep up with the demand.

“People are more willing to spend after lockdowns," Gonzalez said. "And because consumer demand is on the rise, prices are going up. On top of increasing consumer demand, there is a supply shortage due to disruptions in supply chains.”

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Hayes said that even now, “you might live 12,000 miles away” from a coronavirus hotspot in East Asia, “but you’re still living with China’s Zero Covid policy, and if they’re shutting down factories, if you’re looking to buy a new car, you’re still going to have a hard time.” 

A major fire last year at a Japanese semiconductor plant exposed another major weakness in the global supply chain, added Scott, the Monmouth University economist. 

Vladimir Putin's invasion of Ukraine, meanwhile, led to international sanctions on Russia, one of the world's largest oil and natural gas supplies, helping energy prices to shoot up. The war has also affected supplies of wheat and fertilizer, adding to inflation at the supermarket.

The federal coronavirus stimulus packages — trillions of dollars were approved under Presidents Donald Trump and Joe Biden — added to the upward pressure on prices by flooding the economy with new money, said WalletHub's Gonzalez. 

What worked last time? 

The last major inflationary period spanned the 1970s and early 1980s. Federal rate hikes helped bring those increases in check, Gonzalez said.

“The policy consisted of hiking the federal funds rate, which is the rate at which banks lend to each other,” she wrote in an email. “This increased borrowing rates, slowed lending and in time led to inflation returning to low single digits.”

Other factors like geopolitical tensions with OPEC oil producers helped fuel those price increases, Hayes said.

What can I do to save? 

With essentials like food, fuel and rent on the rise, there's little consumers can do to escape the impact, economists said. But for now, customers can do their best to plan out their expenses and stick to a budget, Gonzalez counseled. 

“Keeping track of their cash flow is very helpful when going through financial turbulence,” she said, as is the creation of a rainy-day fund, if you can set aside some earnings.

AAA suggested in the spring that driving more slowly — though a small gesture — will save some money at the pump.

Could more government relief help? 

Though the pandemic stimulus packages flooded the economy with money, Scott said, a recession today might not prompt anywhere near the same level of federal relief, Scott said. Washington seems to have lost its appetite for another round.

At the state level, New Jersey officials have introduced several short-term rebates meant to take some of the financial pain off residents. 

The $50.6 billion state budget that Gov. Phil Murphy signed in June devotes $2 billion toward property tax rebates for 2 million households. It also includes more than $154 million a year in child tax credits, and a sales tax holiday this summer for school supplies. 

But Republicans have panned the rebates because New Jerseyans would not see the benefits until next year. 

“It might be difficult to understand how $5 really makes a difference in a person’s week,” said Hayes, the Rutgers labor expert. “But there are many people in this state that, if they can save a few dollars on school supplies, or if an elderly person is able to get a few dollars off property taxes,” then that could make a difference. 

“That’s just tinkering around the edges,” he added, and ultimately won’t tackle some of the real issues with affordability. 

Bracken, the New Jersey chamber president, criticized state leaders for doing nothing to funnel more money directly to businesses hit by years of inflation, hiring shortages and the pandemic. 

“If things keep going the way they are and there’s no relief in sight, and [businesses] have to lay off people sooner or later,” Bracken said, then “more businesses will close, more jobs will be gone. It’s not a good scenario going forward.”

One silver lining in the ominous economic outlook: The U.S. jobless rate held steady at 3.6% in June for the fourth straight month, just above a 50-year low.