WASHINGTON (AP) – Inflation is starting to look like the unexpected – and unwanted – guest who just does not want to go.
For several months, many economists had given a reassuring message that a rise in consumer prices, which had been gone in the United States for a generation, would not last long. It would turn out to be “temporary”, with the reassuring words of central bank governor Jerome Powell and White House officials, as the economy shifted from virus-related chaos to something closer to normalcy.
But as any American who has bought a carton of milk, a liter of gasoline or a used car can tell you, inflation has set in. And economists are now expressing a more discouraging message: Higher prices are likely to last well into next year, if not beyond.
On Wednesday, the government said that the consumer price index rose by 6.2% from a year ago ̵[ads1]1; the largest 12-month jump since 1990.
“It’s a big blow to the transient narrative,” said Jason Furman, who served as the top economic adviser to the Obama administration. “Inflation is not declining. It is keeping a red-hot pace.”
And the sticker shock hits where families tend to feel the most. At the breakfast table, for example: Bacon prices have increased by 20% in the last year, egg prices almost 12%. Gasoline has increased by 50 percent. Buying a washer or dryer will set you back 15% more than a year ago. Used cars? 26% more.
Although wages are rising sharply for many workers, this is nowhere near enough to keep up with prices. Last month, the average hourly wage in the US, after taking inflation into account, actually fell 1.2% compared to October 2020.
Economists at Wells Fargo are gloomily joking that the Ministry of Labor’s CPI – Consumer Price Index – should stand for «Consumer Pain Index». Unfortunately for consumers, especially lower-paid households, everything coincides with their higher consumption needs just before the holidays.
The price squeeze is escalating the pressure on the Fed to shift faster away from years of simple monetary policy. And that poses a threat to President Joe Biden, the Democratic Democrats and their ambitious spending plans.
WHAT CAUSED THE PRICE Peaks?
A lot of it is the back of very good news. The US economy collapsed in the spring of 2020 as shutdowns took effect, businesses closed or cut opening hours, and consumers stayed home as a health precaution, which was shut down by COVID-19. Employers cut 22 million jobs. Economic production plunged at a record high 31% annual rate in last year’s April-June quarter.
Everyone was preparing for more misery. Businesses are cutting back on investment. Stock replenishment was postponed. And a brutal recession followed.
But instead of sinking into a prolonged downturn, the economy staged an unexpectedly uplifting recovery, driven by massive government spending and a series of emergency measures by the Fed. By spring, the rollout of vaccines had encouraged consumers to return to restaurants, bars and shops.
Suddenly, companies had to move to meet demand. They could not hire fast enough to plug vacancies – almost a record 10.4 million in August – or buy enough supplies to fill customer orders. When the business roared back, ports and shipyards could not handle the traffic. Global supply chains were tightened.
Costs rose. And companies found that they could pass on the higher costs in the form of higher prices to consumers, many of whom had managed to get rid of lots of savings during the pandemic.
“A significant portion of the inflation we see is the inevitable result of getting out of the pandemic,” said Furman, now an economist at Harvard Kennedy School.
Furman, however, suggested that misunderstood politics also played a role. Politicians were so concerned with averting an economic collapse that they “systematically underestimated inflation,” he said.
“They poured kerosene on the fire.”
A flood of government spending – including President Joe Biden’s $ 1.9 trillion in coronavirus assistance package, with $ 1,400 checks to most households in March – overstimulated the economy, Furman said.
“Inflation is much higher in the United States than it is in Europe,” he noted. “Europe is going through the same supply shocks as the United States, the same supply chain problems. But they did not provide nearly as much stimulus.”
In a statement on Wednesday, Biden acknowledged that “inflation is hurting Americans’ wallets, and reversing this trend is a top priority for me.” But he said his $ 1 trillion infrastructure package, including spending on roads, bridges and ports, would help ease supply bottlenecks.
HOW LONG WILL IT LAST?
Consumer price inflation is likely to last as long as companies struggle to keep up with consumers’ huge demand for goods and services. A resurgent labor market – employers have added 5.8 million jobs this year – means Americans can continue to venture into everything from lawn furniture to new cars. And the bottlenecks in the supply chain show no signs of clarification.
“The demand side of the U.S. economy will continue to be something to look at,” said Rick Rieder, chief investment officer of global interest rates at Blackrock, “and companies will continue to have the luxury of going through prices.”
Megan Greene, chief economist at the Kroll Institute, suggested that inflation and the overall economy would eventually return to something closer to normal.
“I think it will be ‘transient,'” she said of inflation, “but economists need to be very honest about defining transient, and I think this could easily last another year.”
“We need a lot of humility to talk about how long this will last,” Furman said. ‘I think it’s been with us for a while. The inflation rate will decline from this year’s strong pace, but it will still be very, very high compared to the historical norms we have been used to. “
WOULD WE LIKE A BACK OF THE 1970S STYLE ‘STAGFLATION’?
The rise in consumer prices has raised the spectrum of a return to “stagflation” in the 1970s. That was when higher prices coincided with high unemployment, contrary to what conventional economists thought was possible.
But the current situation looks very different. Unemployment is relatively low, and overall households are in good shape financially. The Conference Board, a business research group, found that consumers’ inflation expectations last month were the highest they had been since July 2008. But consumers did not seem so worried: The board’s confidence index rose anyway, due to optimism about the job market.
“For now, at least they feel the benefits outweigh the negatives,” said Lynn Franco, the conference board’s senior director of economic indicators.
Economic growth, after declining from July to September in response to the highly contagious delta variant, is expected to pick up in the last quarter of 2021.
“Most economists expect growth to accelerate in the fourth quarter,” Greene said. “So it does not indicate that we are facing both a decline in growth and higher inflation. We are only facing higher inflation.”
WHAT SHOULD POLICY MAKERS DO?
The pressure is on the Fed, which is aimed at keeping inflation in check, to control prices.
“They need to stop telling us that inflation is temporary, start becoming more concerned about inflation, and then act in a way that is consistent with being concerned,” Furman said. “We’ve seen some of it, but only a little.”
Powell has announced that the Fed will start reducing the monthly bond purchases it started last year as an emergency measure to try to boost the economy. In September, Fed officials also predicted that they would raise the Fed’s reference rate from a record low near zero by the end of 2022 – much earlier than they had predicted a few months earlier.
But sharply higher inflation, should it persist, could force the Fed to speed up that schedule; Investors expect at least two rate hikes from the Fed next year.
“We’ve been fighting non-existent inflation since the 1990s,” said Diane Swonk, chief economist at accounting and consulting firm Grant Thornton, “and now we’re talking about fighting real inflation.”
AP Economics writer Christopher Rugaber contributed to this report.