How much could the cost of living go up in California? Keep an eye on housing and oil prices
Californians pay the highest gasoline prices in the nation. Housing prices in the state are soaring. Nationally, the cost of living has been rising at its steepest levels in 13 years.
And it could get worse.
While most economists don’t see the sort of runaway inflation that plagued the country in the 1970s, their forecasts are tinged with uncertainty. Congressional Republicans are blaming Democrats and the Biden administration for stimulus payments they say are driving higher prices.
In California, the biggest variables tend to be housing and the price of oil.
Michael Shires, associate professor of public policy at Pepperdine University, says “inflation in California will outstrip the nation.” The UCLA Anderson state forecast last month showed the state’s cost of living slightly higher than the national projection in the near future.
Marc Schniepp, director of the Santa Barbara-based California Economic Forecast, said the cost of living in the state is higher than in most of the nation, though he did not see prices climbing at a more rapid pace in California than the rest of the country.
The state and national economic consensus at the moment is that any inflationary increases this summer, fall and next year are not anticipated to be huge, but the danger for bigger price spikes is lurking. Nationally, prices increased at an annual rate of 5% in May.
The UCLA Anderson forecast sees the national Consumer Price Index, which measures the cost of living, going up at an annualized rate of 3.2% this quarter, then dropping to 2% at the end of next year
It sees prices in California growing at an annualized rate of 3.4% this summer, then slowly declining to 2.2% by the fall of 2022.
Indicators so far are “pointing to a softening of inflation between 2021 and 2022,” said Wendy Edelberg, senior fellow in economic studies at Washington’s Brookings Institution.
But a lot of economists add these asterisks:
The state and country are experiencing an economy as unpredictable as any in modern times.
Supply and demand growth are often now out of balance.
The country is recovering from a pandemic, but is a return to routine mask-wearing and caution possible in California?
If inflation remains moderately high, will workers want higher salaries, requiring businesses to then raise prices to help pay for the increases?
“The uncertainties here are just unprecedented,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. He and Edelberg spoke at a recent forum hosted by the nonpartisan Committee for a Responsible Budget.
California prices headed up
On Friday, AAA found that state motorists paid an average of $4.30.8 a gallon for regular gasoline, well above the national average of $3.41.3.
Taxes are a major reason gasoline prices are higher, says AAA. Nationally there are several factors, including more demand for oil and leisure travel.
Schniepp, though, noted that California gasoline prices have risen at the same pace as those of the nation over the last 18 months.
In the housing area, Scott Anderson, chief economist at the Bank of the West, found that state median existing home prices are projected to climb from 9.8% in 2020 to 13.1% this year, then drop to 5% next year.
He attributed the potential 2022 decline to higher rates on mortgages, people less able to afford housing and growing inventory.
But Schniepp noted that if the supply of housing in the state remains tight and costs keep going up faster than the U.S. average, “then higher rates of inflation in California would prevail. There is probably some reason to believe this is a possibility over the next year or two.”
Is runaway inflation possible?
The current price spikes are usually in areas where supply and demand growth are out of balance. The federal Bureau of Labor Statistics cited May increases in the prices of used cars and trucks, household furnishings and operations, new vehicles, airline fares, and apparel.
One-third of the overall May increase came from a 7.3% jump in the price of used cars and trucks.
“A number of these components’ increases are transitory,” said Schniepp.
Food costs, which make up a major portion of the Consumer Price Index, “are not likely to rise persistently in California versus the rest of the country,” he said, adding he also sees the state in line with national averages on most products.
“Californians can always order products — nearly all products — from other states or globally. This makes it very hard for retailers located here in California to raise prices beyond the competitive rate prevailing nationwide or even worldwide in many cases,” he said.
But economists are being cautious about the outlook. “We’re going to have another year or year and a half of demand being larger than supply and putting pressure on prices,” Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, told the inflation forum.
A big unknown is the cost of labor. Popular unemployment benefits, notably the additional $300 a week and the Pandemic Unemployment Assistance program for gig workers and independent contractors, will be gone by September. As of July 11, California is requiring most people seeking unemployment benefits to certify they’re seeking work in order to receive benefits.
No one knows for sure if people are not working because they can earn more from these benefits, and whether they’ll flood the labor market this summer and fall. Or whether they’ll hold out for higher wages.
“I don’t think there’s a simple single explanation for missing persons in the labor force,” Shepherdson said.
There are just too many unknowns regarding the economy, he said.
“Anyone banging the table saying they know what’s gonna happen,” he said, “is kidding themselves.”
This story was originally published July 13, 2021 at 5:00 AM.
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