Consumer Prices Jumped at Fastest Pace Since 1982

Inflation closed out 2021 on a high note, bad news for the Biden White House and for economic policymakers as rapid price gains erode consumer confidence and cast a shadow of uncertainty over the economy’s future.

The Consumer Price Index climbed by 7 percent in the year through December, and by 5.5 percent after stripping out volatile prices such as food and fuel. The last time the main inflation index eclipsed 7 percent was 1982.

Policymakers have spent months waiting for inflation to fade, hoping supply chain problems might ease, allowing companies to catch up with booming consumer demand. Instead, continued waves of virus have locked down factories, and shipping routes have struggled to work through extended backlogs as consumers continue to buy goods from overseas at a rapid clip. What will happen next might be the biggest economic policy question of 2022.

Wednesday’s fresh data showed that the cost of used cars, shelter and food are all increasing quickly.

Prices for used cars and trucks have been a big driver of recent inflation. Auto manufacturers have been struggling to get their hands on parts — particularly computer chips imported from Asia — delaying production of new vehicles and pushing up demand for a finite supply of used ones.

Recent lockdowns in China meant to contain the coronavirus could exacerbate the shortage. When it comes to vehicle prices, “it’s not over yet,” said Jim O’Sullivan, chief U.S. macro strategist at T.D. Securities, said before the report.

As prices continue to surge, economic policymakers are poised to react. Federal Reserve officials have indicated that they expect to raise interest rates several times this year as they try to slow down demand and the economy, in a bid to make sure that the pandemic-era burst in prices does not become a permanent feature of the economic landscape.

Jerome H. Powell, the Fed chair, emphasized on Tuesday, when he spoke before the Senate Banking Committee at a renomination hearing, that the Fed’s moves to reduce policy help will adjust to the economic conditions.

“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” he said at the hearing.

Investors and economists increasingly expect four interest rate increases this year.

The future trajectory of inflation is uncertain, as price pressures spread across many categories.

While gas prices moderated somewhat in December, food has been growing steadily more expensive. Food at home climbed in price in December, while food away from home grew even more rapidly last month — and full-service restaurant meals picked up by 6.6 percent over the year.

Economists and Wall Street analysts tend to closely focus on a measure of prices that strips out food and fuel costs, because they jump around a lot from month to month, but those expenses matter a lot to households.

The fact that high prices are taking a bite out of household budgets seems to be one of the reasons that consumer confidence has faltered; gas and food tend to be among the most salient costs for shoppers.

Jon Willow, 55 and from Interlochen, Mich., has seen grocery costs climb steeply since the pandemic started — so much that she and her partner have tried to move away from purchased produce by canning vegetables from their garden and heating their henhouse through the winter so that their chickens keep producing eggs.

“We have a no-food-left-behind policy at the house now — we use everything,” she said, noting that they had preserved tomatoes, squash and asparagus.

The pair are worried about whether their retirement savings will last as long as they had expected and planned for, given the quicker price increases. Both are still working: Ms. Willow has a communications practice that works with local governments and utilities and is co-founder of a nonprofit focused on expanding rural broadband. Her partner is a full-time design engineer at a local business that makes custom signs for large companies. They had planned for the future assuming a lower inflation rate.

A critical question for families like Ms. Willow’s is how long today’s heady inflation persists. Policymakers and economists had initially hoped that they would alleviate quickly, and still expect them to moderate throughout 2022. Mr. O’Sullivan at T.D. Securities said he thinks price gains could hover around 7 percent for a few months before beginning to decline, which would make this roughly peak inflation.

They are, however, paying attention to a few factors that could keep prices rising too quickly for comfort.

While inflation pressures were centered squarely on goods early in the pandemic, they have recently been creeping into services — and importantly, into rents. Housing costs based on rents make up about a third of the Consumer Price Index, so the fact that landlords are charging more matters a lot for overall inflation.

Officials are also very uncertain about when the supply chain crisis that has pushed up the cost of cars, couches and imported goods of all kinds will abate. There are early signs that shipping route snarls and depleted inventories may be moderating, but other signals suggest a return to normal will take time.

“You always see a few snowflakes, but it doesn’t amount to a storm yet,” Mr. Powell, the Fed chair, said during Senate testimony on Tuesday, of signs that kinks in the supply chain are resolving themselves.

Caroline McCroskey, 27 and from Tulsa, Okla., manages marketing for a furniture manufacturer that imports pieces from China and Cambodia and sells them to major retailers. The company has seen sharp cost increases as shipping container prices have rocketed higher.

“The freight is bad enough, but we’ve seen a dramatic increase in leather hides and fabrics,” she said. “Nobody is feeling super optimistic about shipping rates returning to normal anytime soon.”

High inflation is a political liability for the White House as Democrats head into a midterm election year when they will battle to retain control of Congress. Republicans have increasingly accused President Biden of driving prices higher by flooding the economy with too much money, including a third round of stimulus checks.

The administration is doing what it can to alleviate the supply chain problems, from pushing for longer port opening hours to releasing strategic petroleum reserves to help bring fuel prices down. But most economists say that those moves only help around the edges.

“Inflation has become a dominant political issue, but one that is largely out of the administration’s control,” Alec Phillips, an economist at Goldman Sachs, wrote in a recent research report.

Source: NYT > U.S. > Politics

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