Spending on services such as travel, entertainment and dining out expected to come back.
An improving public health situation coupled with massive fiscal support has given new life to consumers, who have been on a spending binge that's driving economic growth. And with COVID-related restrictions now being lifted, spending on services such as travel, entertainment and dining out, which in pre-pandemic days accounted for almost 70% of overall expenditures, is expected to come back.
With more activity returning, Oxford Economics projects robust economic growth in the summer, boosting the economy past a full recovery and overshooting its pre-COVID growth path in 2021.
Strong demand from both households and firms surprised factories and suppliers, which have had a hard time keeping up. Business inventories have been depleted, delivery times have lengthened and supply chains faced numerous challenges, including shortages and rising costs of inputs and materials.
Some of these costs may now be percolating into consumer prices, with inflation rising to rates not seen since 2008. Many of the current price and cost pressures are expected to be temporary, as supply chain disruptions sort themselves out and the supply of goods catches up with demand.
Evidence of rising prices hasn’t motivated the Federal Reserve to move away from its accommodative policy, as it awaits the labor market to reach its “broad-based and inclusive maximum employment” goal. The Fed is still expanding its balance sheet and holding its policy rate at near zero. It is not expected to begin tapering asset purchases until next year, and it will likely be 2023 before it hikes interest rates.