CPI December 2021: Inflation surged at the fastest pace since 1982
Inflation closed 2021 on a positive note, troubling news for Biden’s White House and for economic policymakers, as rapid price gains erode consumer confidence and cast a shadow of uncertainty over the future of the ‘economy.
The consumer price index climbed 7 percent during the year through December and 5.5 percent after excluding volatile prices such as food and fuel. The last time the main inflation index eclipsed 7% was in 1982.
Policymakers have spent months waiting for inflation to subside, hoping that supply chain problems might ease, allowing businesses to catch up with soaring consumer demand. Instead, continuous waves of viruses have locked factories down, and shipping lanes have struggled to weather protracted arrears as consumers continue to purchase goods abroad at a rapid pace. What happens next could be the biggest economic policy question of 2022.
“Obviously, 7% is a pretty big shock,” said Omair Sharif, founder of research firm Inflation Insights. He believes inflation could peak around 7%, but that it will take time to recover from that peak – and is expected to end 2022 above the nearly 2% level that policymakers prefer.
“It’s just a lot of lumber to cut down to get through to anything near the good old days,” Sharif said.
New data released Wednesday showed the cost of used cars and food is rising rapidly and provided further evidence that costs are widening beyond a few categories disrupted by the pandemic. Rents continue to rise steadily and meals at full-service and limited-service restaurants are more expensive, perhaps a sign that recent wage increases are starting to translate into higher prices as employers seek to cover higher labor costs.
“This report highlights that we still have work to do, with price increases still too high and family budgets tight,” President Biden said in a statement following the report.
As price gains become widespread – a worrying sign they could persist even as pandemic disruptions wear off – policymakers are poised to respond. Federal Reserve officials have indicated that they plan to raise interest rates several times this year as they attempt to slow demand and the economy in a bid to ensure that the price explosion in the era of the pandemic does not become a permanent feature of the economic landscape.
Jerome H. Powell, chairman of the Fed, pointed out on Tuesday that the central bank was shifting into inflation-fighting mode after months of trying to prop up the pandemic-stricken economy. Officials expect price hikes to moderate this year, but are closely watching how quickly that happens.
“If we see inflation persist at high levels for longer than expected, if we need to raise interest rates further over time, we will,” Powell told lawmakers at a hearing of the Senate Banking Committee Tuesday.
Based on recent data and comments from the Fed, investors and economists are increasingly expecting four interest rate hikes this year. But the trajectory of inflation – and therefore of policy – is uncertain.
The prices of used cars and trucks have been a major driver of recent price increases. Automakers are struggling to get their hands on parts – especially computer chips imported from Asia – delaying production of new vehicles and increasing demand for a limited supply of used vehicles.
As for vehicle prices, “it’s not over yet,” Jim O’Sullivan, chief US strategist at TD Securities, said before the report.
Recent lockdowns in China aimed at containing the coronavirus, inspired by the country’s continued adherence to a zero-tolerance policy regarding the pandemic, could exacerbate the chip shortage, among other supply chain issues.
“If they stick to their zero case doctrine, a global supply chain disaster is on the horizon,” said Tinglong Dai, professor of operations management at the University’s Carey Business School. Johns Hopkins.
Gasoline prices moderated somewhat in December, but food is increasingly expensive. Home food prices increased in December, meals in full-service restaurants increased 6.6% during the year and meal prices in limited-service restaurants increased 8%.
Wall Street economists and analysts tend to focus closely on a price metric that excludes the costs of food and fuel, as they jump a lot from month to month, but these expenses matter a lot to households.
The fact that high prices are eating into household budgets seems to be one of the reasons why consumer confidence has weakened; gas and food tend to be among the biggest costs for buyers.
Jon Willow, 55, of Interlochen, Michigan, has seen grocery costs skyrocket since the start of the pandemic – so much so that she and her partner have tried to move away from purchased produce by highlighting preserving vegetables from their garden and heating their hen house during the winter so that their hens continue to produce eggs.
What is inflation? Inflation is a loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it has today. It is generally expressed as the annual change in the prices of common goods and services such as food, furniture, clothing, transportation costs, and toys.
“We now have a no-home feed policy – we use everything,” she said, noting that they had saved tomatoes, squash and asparagus.
The pair are worried about whether their retirement savings will last as long as they planned and expected, given the faster price increases. Both still work: Ms. Willow has a communications practice that works with local governments and utilities and is a co-founder of a nonprofit focused on expanding rural broadband. His partner is a full-time design engineer at a local company that manufactures custom panels for large companies. They had predicted the future assuming a lower rate of inflation.
A crucial question for families like Ms. Willow’s is how long today’s skyrocketing inflation persists. Policymakers and economists had initially hoped they would ease quickly, and still expect them to moderate through 2022. Like Mr Sharif, Mr O’Sullivan of TD Securities said ‘he thought the price gains might hover around 7% for a few months before starting. lower, which would make this inflation roughly peak.
However, economists are paying attention to a few factors that could push prices up too quickly for convenience.
Inflationary pressures were squarely centered on goods at the start of the pandemic, but they have recently crept into services – and, importantly, rents. Rent-based housing costs make up about a third of the consumer price index, so whether homeowners charge more matters a lot to headline inflation.
Officials are also unsure when the supply chain crisis that has driven up the cost of cars, sofas and imported goods of all kinds will subside. There are early signs that grunts on shipping lanes and depleted stocks may moderate, but other signals suggest that a return to normal will take time.
“You still see some snowflakes, but it doesn’t amount to a storm yet,” Fed Chairman Powell said during Senate testimony on Tuesday, referring to signs that there are problems. in the supply chain resolved themselves.
Caroline McCroskey, 27, from Tulsa, Oklahoma, manages marketing for a furniture maker that imports pieces from China and Cambodia and sells them to major retailers. The company saw a sharp increase in costs as the prices of shipping containers soared.
“Freight is bad enough already, but we’ve seen a dramatic increase in leathers and leather fabrics,” she said. “No one is feeling super optimistic that shipping rates will return to normal anytime soon.”
High inflation is a political handicap for the White House as Democrats head into a midterm election year where they fight to retain control of Congress. Republicans have increasingly accused President Biden of pushing prices up by flooding the economy with too much money, including a third round of stimulus checks.
The administration is doing what it can to alleviate supply chain problems, from extending port hours to freeing up strategic oil reserves to help bring fuel prices down. But most economists say these moves only help at the edges.
“Inflation has become a dominant political problem, but one that is largely beyond the control of the administration,” wrote Alec Phillips, an economist at Goldman Sachs, in a recent research report.