The U.S. Just Recorded Its Highest Consumer Price Jump in 40 Years. But Relief Could Come Soon

The U.S. consumer prices rose 6.8% to November from a year ago. This was due to rising costs of food, fuel, and housing. It is the highest inflation rate in American history since 1982.

Friday’s report by the Labor Department showed that prices rose 0.8% from October to November.

The inflation has increased the pressure on consumers, particularly those with lower incomes and for daily necessities. It has also negated the higher wages many workers have received, complicated the Federal Reserve’s plans to reduce its aid for the economy and coincided with flagging public support for President Joe Biden.

The rapid rebound from pandemic recession has fueled inflation with a mixture of factors: A flood in government stimulus, low interest rates by the Fed, and supply problems at U.S. and international factories. Manufacturers have been slowed by heavier-than-expected customer demand, COVID-related shutdowns and overwhelmed ports and freight yards.
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In an effort to address worker shortages, employers have been increasing pay and some have raised prices to compensate for higher labor costs. This has led to increased inflation.

Price increases have been seen for everything from used cars and food to household furniture and electronics. As Americans flooded their factories with orders to produce goods after the pandemic struck, this price acceleration spread to all services. These services include apartment rentals, restaurant meals, entertainment, and medical services.

The persistence of high inflation has surprised the Fed, whose chair, Jerome Powell, had for months characterized inflation as only “transitory,” a short-term consequence of bottlenecked supply chains. Powell indicated a change two weeks ago. He implicitly acknowledged that inflation had lasted longer than expected. Powell suggested that it was likely the Fed would act faster to end its ultra-low rate policy than originally planned.

Economists believe that inflation will rise in the next few months, then slowly ease off and offer some relief to consumers. According to them, supply problems in certain industries are beginning to ease. While higher energy costs are expected to continue to impact consumers over the next months, Americans should be spared earlier predictions that they would see record-breaking energy prices in winter.

The oil prices are slowly falling, which has led to slightly higher gasoline prices. AAA reports that a gallon is $3.38 per gallon, down from $3.42 last month.

Natural gas prices are down nearly 40% since October, when they were at their highest level in seven years. The result is that while average home heating costs will well exceed last year’s levels, they won’t rise as much as had been feared.

A sharp drop in wheat and corn price could also lead to food inflation.

Mark Wolfe of the National Energy Assistance Directors Association, stated that heating a house this winter will cost an average $972. That’s less than the $1,056 his group had projected in October, though still higher than the average $888 consumers paid to heat homes last year.

In the last few weeks energy prices have been affected by a number of factors. The natural gas futures are down due to the unseasonably warm climate. Additionally, several major countries have committed to releasing oil from their strategic reserves. The OPEC+ oil cartel also reached an agreement to allow more oil to be released in January.

What’s more, the emergence of the omicron variant of the coronavirus has renewed the prospect of more canceled or postponed travel and fewer restaurant meals and shopping trips. If it did happen, all of this would reduce consumer spending as well as business spending, and possibly restrain inflation.

However, analysts warn against unexpected developments like heavy winter storms that could lead to increased demand and push energy prices higher again.

However, analysts warned that further improvement in global supply chain normalization will be necessary to ease inflation. White House officials claim that they think that there are a number of steps that have been taken by the administration to reduce inflation. These include increasing the processing of cargo at Los Angeles ports and Long Beach, as well as the release of crude petroleum from the oil reserve.

However, some outside economists are beginning to agree with this viewpoint.

“I think November will be the worst of it, and going forward we will see steady improvement,” said Mark Zandi, chief economist at Moody’s Analytics. “As the delta wave of COVID has receded and supply chains start to repair themselves, we will start to see production and shipments improve.”

Zandi said he believes that inflation will begin improving with the December price report and that by this time next year, annual inflation will be back down to around 3%, closer to the Fed’s 2% target.

Despite persistently high inflation, it is likely that the Fed will announce an acceleration in the Fed’s monthly bond purchase reduction after its next meeting. These purchases were made to reduce long-term borrowing cost.

The Fed would be able to increase its short-term rate by doing so. This could happen as soon as next year’s first quarter. Since March 2020 when the economic crisis caused by the coronavirus, the rate has been almost zero.