(WASHINGTON) — Inflation is starting to look like that unexpected—and unwanted—houseguest who just won’t leave.
For months, many economists had sounded a reassuring message that a spike in consumer prices, something that had been missing in action in the U.S. for a generation, wouldn’t stay long. It would prove “transitory,’’ in the soothing words of Federal Reserve Chair Jerome Powell and White House officials, as the economy shifted from virus-related chaos to something closer to normalcy.
But, as anyone American could have seen, inflation has set in. The economists have now issued a dismal warning: Higher prices could continue for at least the rest of next year.
On Wednesday, the government said its consumer price index soared 6.2% from a year ago — the biggest 12-month jump since 1990.
“It’s a large blow against the transitory narrative,’’ said Jason Furman, who served as the top economic adviser in the Obama administration. “Inflation is not slowing. It’s maintaining a red-hot pace.’’
Sticker shock is felt most by families. The breakfast table is an example: Egg prices have risen nearly 12% and bacon prices are up 20% in the past year. Oil prices have risen by 50%. The cost of a washer and dryer is 15% higher than it was a year earlier. Pre-owned cars are 26% more. Used cars: 26% less
Although pay is up sharply for many workers, it isn’t nearly enough to keep up with prices. The average hourly wage in America fell by 1.2% last month after taking into account inflation.
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Economists at Wells Fargo joke grimly that the Labor Department’s CPI — the Consumer Price Index — should stand for “Consumer Pain Index.’’ Unfortunately for consumers, especially lower-wage households, it’s all coinciding with their higher spending needs right before the holiday season.
As the price pressure increases, it is placing increasing demands on Fed to quickly shift away from its years-long easy-money policy. It is a danger to President Joe Biden and congressional Democrats, as well as their ambitious spending plans.
Was there a reason for the sudden price rises?
It is often the opposite of great news. COVID-19 was the catalyst that caused the collapse of the U.S. Economy in spring 2020. Businesses closed, hours were cut, and people stayed home to protect their health. Employers slashed 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in last year’s April-June quarter.
All of us are ready for misery. Companies cut investment. Stockpiling was delayed. A severe recession followed.
The economy bounced back from a lengthy downturn and showed surprising resilience, thanks to huge government spending and an array of Fed-issued emergency moves. The rollout of vaccines encouraged consumers to go back to bars, restaurants and shops by spring.
Businesses were forced to respond quickly in order to keep up with demand. They couldn’t hire fast enough to plug job openings — a near record 10.4 million in August — or buy enough supplies to fill customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. As global supply chains became choked, so did the world.
The costs rose. Companies realized that higher costs could be passed on to customers in the form higher prices. Many consumers had saved a lot during the pandemic.
“A sizeable chunk of the inflation we’re seeing is the inevitable result of coming out of the pandemic,’’ said Furman, now an economist at the Harvard Kennedy School.
Furman said that misguided policies played an important role as well. Policymakers were so intent on staving off 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 coronavirus relief package, with its $1,400 checks to most households in March — overstimulated the economy, Furman said.
“Inflation is a lot higher in the United States than it is in Europe,’’ he noted. “Europe is going through the same supply shocks as the United States is, the same supply chain issues. But they didn’t do nearly as much stimulus.’’
In a statement Wednesday, Biden acknowledged that “inflation hurts Americans’ pocketbooks, 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.
It will last how long?
Consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ prodigious demand for goods and services. A resurgent job market — employers have added 5.8 million jobs this year — means that Americans can continue to splurge on everything from lawn furniture to new cars. The supply chain blockages are not going away.
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“The demand side of the U.S. economy will continue to be something to behold,’’ says Rick Rieder, chief investment officer for global fixed income at Blackrock, “and companies will continue to have the luxury of passing through prices.”
Megan Greene is the chief economist of the Kroll Institute. She suggested that the economy and inflation will soon return to normal.
“I think it it will be ‘transitory’,’’ she said of inflation. “But economists have to be very honest about defining transitory, and I think this could last another year easily.’’
“We need a lot of humility talking about how long this lasts,” Furman said. “I think it’s with us for a while. The inflation rate is going to come down from this year’s blistering pace, but it’s still going to be very, very high compared to the historical norms we have been used to.’’
Will we suffer a return of 1970’S-style ‘stagflation’?
The run-up in consumer prices has raised the specter of a return to the “stagflation’’ of the 1970s. There was a time in which higher prices were associated with high unemployment in contradiction to conventional economists’ expectations.
Yet today’s situation looks very different. The unemployment rate is low and overall, households are financially well-off. The Conference Board, a business research group, found that consumers’ inflation expectations last month were the highest they’d been since July 2008. But consumers didn’t seem all that worried: The board’s confidence index rose anyway, on optimism about the job market.
“For the time being, at least, they feel that the benefits are outweighing the negatives,’’ said Lynn Franco, the Conference Board’s senior director of economic indicators.
The final quarter of 2021 is predicted to see an increase in economic growth after a slowdown in July-September due to highly contagious Delta variant.
“Most economists are expecting growth to accelerate in the fourth quarter,” Greene said. “So it doesn’t suggest that we’re facing both a tanking of growth and higher inflation. We’re just facing higher inflation.’’
How should policymakers respond?
Pressure is being placed on the Fed to keep inflation under control and maintain prices.
“They need to stop telling us that inflation is transitory, start becoming more worried about inflation, then act in a manner consistent with being worried,’’ Furman said. “We’ve seen a little bit of that, but only a little bit.’’
Powell said that the Fed would reduce its monthly bond purchase program, which was initiated last year to help boost the economy. In September, Fed officials also forecast that they would raise the Fed’s benchmark interest rate from its record low near zero by the end of 2022 — much earlier than they had predicted a few months earlier.
However, if inflation continues to rise, the Fed might be forced to speed up its rate increase; investors can expect two Fed rate increases next year.
“We’ve been fighting non-existent inflation since the 1990s,’’ said Diane Swonk, chief economist at the accounting and consulting firm Grant Thornton, “and now we’re talking about fighting an inflation that is real.’’
— AP Economics Writer Christopher Rugaber contributed to this report.