Consumer Prices Rose at Fastest Pace Since 1982

Prices are rising at the fastest pace in nearly 40 years, new data released Friday showed, as supply chain disruptions, rapid consumer demand and rising housing costs fuel an explosion. inflationary.

Rising consumer costs could spell trouble for Federal Reserve and White House officials, who are trying to calibrate policy at a time when the job market has not yet fully recovered from the pandemic, but price increases are proving to be more persistent than political ones. provided.

The consumer price index rose 6.8 percent in the year through November, the data showed, the fastest pace since 1982. After eliminating food and fuel, which can move a lot from month to month, the inflation rose 4.9 percent. That was the fastest annual reading since 1991.

Monthly price increases, the change between October and November, rather than last year, moderated a bit, but still increased at an unusually fast rate.

The question is what happens next. Fed officials are increasingly concerned about inflation, both because the rally has lasted longer than expected and because it shows signs of spreading to areas less affected by the pandemic, increasing the risk that quick wins will take hold.

“It just keeps the pressure on Fed officials,” said Kathy Bostjancic, director of US macro-investor services at Oxford Economics.

Earlier this year, price increases were concentrated in goods. There was demand for used cars and sofas as the pandemic changed people’s lifestyles. Factories around the world struggled to keep up with increased purchases, in part because closures linked to the virus disrupted production. Shipping routes and ports were also clogged as demand followed an atypical pattern, with too many U.S.-bound products trying to get out of Asia in particular. As the supply fell short, prices soared.

Those interruptions were expected to be temporary. Instead, they have lasted for months as demand for products remains strong and the virus continues to disrupt manufacturing and transportation.

Inflationary pressures are also spreading to areas that are not as directly affected by the virus. Rental costs, for example, have recovered dramatically as home prices skyrocket and lock potential buyers out of the market. Housing costs make up a large part of the consumer price index, so it’s helping drive headline inflation.

Jennifer Callahan, a mother of two in the Denver area, has been renting a three-bedroom home since her previous home caught fire in early 2020. But local rents are rising and she’s worried she won’t be able to find a comparable location. for something like the $ 2,400 that she and her roommate are paying if their lease is not renewed.

“The houses in this area are selling for crazy amounts of money,” he said. “So you totally screw up the rental market.”

As costs rise on a broader range of goods and services, the Fed is increasingly concerned.

“In general, the higher prices we are seeing are related to supply and demand imbalances that can be directly traced to the pandemic and the reopening of the economy, but it is also the case that price increases have spread. much more widely in recent months, ”said Jerome H. Powell, Fed chairman, during testimony before Congress late last month. “I think the risk of higher inflation has increased.”

Fed officials are putting themselves in a position to use their policy tools to reduce inflation, should the need arise.

Powell noted last week that the Fed, which outlined a plan to begin cutting economic support in November, is prepared to discuss speeding up that process at its two-day policy meeting next week. Economists expect the Fed to announce a plan to slow down its monthly bond purchases fast enough for the program to end earlier than originally planned.

That would mean that the Fed is adding less energy to the economy with each passing month. It would also allow officials to raise interest rates, their most powerful tool, more quickly. Policymakers have made it clear that they would rather finish buying bonds before increasing borrowing costs, which are set close to zero, so that their policy tools don’t work with each other.

Friday’s data will keep lawmakers on the right track to accelerate their plans to cut bond purchases, said Alan Detmeister, a senior economist at UBS and former head of the wage and price division at the Fed’s Board in Washington.

“This is still a huge, very, very strong figure,” Detmeister said, explaining that while he expects inflation to moderate, it could take until the middle of next year for it to show clearly in the year before. -year of data.

“It seems pretty clear that they are going to speed up the set-up,” he added.

Moving to the next step, raising rates, makes debt of all kinds, from mortgages to auto and business loans more expensive. That would likely slow spending and hiring, cooling demand and lowering high housing costs. The combination could help curb price gains.

But it could also leave the country with a less competitive job market. That could be bad if the millions of people who remain out of the job market compared to before the pandemic decide to embark on a job search. Many workers have not yet returned due to child care problems and other factors related to the virus.

Still, the Fed is wary of allowing inflation to spiral out of control. In the 1960s, the central bank was not decisive enough to stop rising prices. Inflation skyrocketed, climbing to double-digit levels during the 1970s, and Paul Volcker, then Fed chairman, dramatically raised interest rates to get things under control in the early 1980s.

The hit to demand triggered a painful recession before it controlled price gains. The mistake, and its consequences, has dogged central bankers ever since.

This time, Fed officials are watching wages and consumer expectations to try to assess whether prices are about to get more troubled.

As housing costs and other day-to-day costs rise, workers may start asking for raises to help offset the financial hit. Rising wages can fuel inflation as businesses pass rising labor costs onto consumers and larger paychecks help households keep spending, keeping up with consumer demand.

The data shows that pay is already increasing rapidly. Employers are competing for workers at a time when job openings far exceed the number of people actively seeking work and are raising wages to attract and retain workers. The employment cost index, a measure the Fed watches closely, rebounded markedly in the three-month period ending in September.

Wages are rising especially fast for low-income people, although they haven’t kept pace with accelerating prices for most workers in recent months. Still, ongoing government benefits, including an expanded child tax credit, may mean that families are better positioned to cope with increased expenses.

Because consumers have had the means to spend, companies have been able to charge more, protecting and even increasing their bottom line as input costs rise. Profit margins for a large swath of companies have widened this year, even in some of the industries hardest hit by supply problems.

“In fact, we are seeing that the price increases that we have suffered as a result of covering the costs that we get from the input product and the freight are being absorbed by the customer,” Bruce K. Thorn, CEO of Big Mucho, said in an earnings call on Dec. 3, then added that “we are not seeing that resistance.”

Democrats have begun to exploit big business for seizing the moment.

“Now, while working families are beginning to rebound, mega-corporations would rather pass higher costs on to consumers than cut their profits,” Senator Sherrod Brown, a Democrat from Ohio, said at a recent hearing.

But the Republicans have blame about Biden and the Democrats, an event that threatens to jeopardize the president’s broader agenda, including the $ 2.2 trillion social and climate policy bill he’s trying to pass along party lines. . Centrist Democrats have begun to question the wisdom of putting more money into the economy at a time when demand and prices are high.

“The unknown we face today is far greater than the need for people to believe in this aspirational bill that we are looking at, and we need to make sure we get it right,” Sen. Joe Manchin III, D-West Virginia, told earlier this week. Biden will need the support of all Senate Democrats to pass the legislation, making Manchin’s vote critical.

Inflation is also a political drag on the White House among voters, because it makes everyday life difficult for many Americans, especially those who depend on savings held in relatively low-risk investments like savings accounts or certificates of deposit. Those people are seeing the value of their properties decrease.

Retirees living on Social Security will see their benefits increase (the cost of living adjustment for 70 million Americans will be 5.9 percent in 2022), but they are already feeling the brunt of higher consumer prices.

Diana Madoshi, a retired nurse from Placer County, California, who relies on Social Security benefits, said higher prices at the grocery store have started to strain her budget. A box of eggs, which cost about $ 2.80 before the pandemic, now costs nearly $ 4, he said.

He’s been taking fewer Uber rides to doctor’s appointments and cutting back on clothing purchases to offset costs.

“This is just another harsh reality of what we are going through right now,” said 75-year-old Madoshi. “And there is nothing I can do about it.”

– Madeleine Ngo contributed reporting.

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