Persistently high car prices offered an early warning that inflation brought on by the pandemic might be stickier than many anticipated. If the United Auto Workers and the big three car manufacturers fail to reach agreement on a labor contract by next week, Federal Reserve Chair Jerome Powell and President Joe Biden’s efforts to bring down prices could get taken for a ride. Senior Fed policymakers have already identified a UAW strike as a potential threat to supply chains that have only recently recovered from Covid-era bottlenecks. Auto inventories are still at a fraction of where they were before the pandemic, and demand for both new and used cars has remained strong. Price growth is starting to slow and the semiconductor shortage that waylaid production has started to abate. Even so, disinflation in the sector is taking longer than many expected. The economic effect of a prolonged work stoppage at all three auto manufacturers — UAW’s 2019 strike at General Motors lasted 40 days — would be akin to that of a leaky brake line: It might not be noticeable early on, but the longer you wait to fix it, the harder you have to work to slow down. “Spillovers will start out limited, or modest,” said Gabriel Ehrlich, director of the University of Michigan’s Research Seminar in Quantitative Economics. “If a strike went on longer than six weeks, we would expect those spillovers to be thicker.” Ehrlich’s team produced a report late last week forecasting that Michigan’s economy could “wobble” in the event of a six-week work stoppage against one automaker, but not enough to throw off the three-year growth trajectory. Automakers would likely maintain purchases to preserve supply chains and assure they could “quickly gear back up” once the strike ends, he said. Just as importantly, those suppliers would be unlikely to lay off their own workers during that time so they could preserve positions against tight labor market conditions. If a UAW strike against Ford, General Motors and Stellantis were to extend beyond six weeks, the situation would get much more complicated. For one, it could put a dent in those still-recovering auto inventories — GM delivered about 30,000 fewer vehicles during the 2019 strike — which would likely cause prices to rise more quickly, creating another inflationary force as Fed officials contemplate a complicated path forward on rate policy. And with workers sidelined, consumer spending around the state would slow, Ehrlich said. Supply chain disruptions would be more likely and investments in new or existing plants could fade. (Perversely, that sort of slowdown could also help cool inflation around Detroit, where prices have climbed faster than the rest of the U.S.) “It's tough to measure these things. There's a lot of uncertainty around how that would play out,” Ehrlich said. Of course, that’s why everyone wants to get a deal done as quickly as possible. But it’s far from clear if that’ll happen. On Wednesday, UAW President Shawn Fain told the Associated Press that the union planned to go on strike against any of the Big Three car makers if they haven’t brokered a tentative deal by the time their current contracts expire shortly before midnight on Sept. 14. “We’re going to do whatever we have to do to get an agreement,” Fain said. “If the companies choose not to do that — and they choose the strike themselves — then it’s going to happen.” IT’S THURSDAY — For some reason, this song is stuck in your host’s head. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com
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