US inflation still untamed
At first, it didn’t even register as a threat. Then it seemed like a temporary annoyance.
Now, inflation is flashing red for the US Federal Reserve’s policymakers – and delivering sticker shock to Americans at the used car lot, the supermarket, the gas station, the rental office.
On Wednesday, the United States Labor Department reported that consumer prices jumped 7.0 per cent in December, compared with 12 months earlier – the hottest year-over-year inflation since June 1982. Excluding volatile energy and food prices, what is called ‘core’ inflation rose 5.5 per cent over the past year, the fastest such pace since 1991.
Bacon prices are up nearly 19 per cent from a year ago, men’s coats and suits nearly 11 per cent, living and dining room furniture more than 17 per cent. Renting a car will cost you 36 per cent more, on average, than it did in December 2020.
“Prices are increasing broadly throughout the economy, and the Federal Reserve has been caught off guard by the extent of inflation,’’ said Gus Faucher, chief economist at PNC Financial.
It wasn’t supposed to be this way – not with the coronavirus pandemic keeping people hunkered down at home and triggering a devastating recession beginning in March 2020. Barely more than a year ago, the Fed had forecast that consumer prices would end 2021 only about 1.8 per cent higher than they were a year earlier, below even its annual 2.0 per cent inflation target.
Yet after having been an economic afterthought for decades, high inflation reasserted itself last year with astonishing speed. In February 2021, the Labor Department’s consumer price index was running just 1.7 per cent ahead of a year earlier. From there, the year-over-year price increases accelerated steadily – 2.6 per cent in March, 4.2 per cent in April, 4.9 per cent in May, 5.3 per cent in June. By October, the figure was 6.2 per cent, by November 6.8 per cent.
Fed changed course
At first, Fed Chair Jerome Powell and others characterised higher consumer prices as merely a “transitory” problem – the result, mainly, of shipping delays and temporary shortages of supplies and workers as the economy rebounded from the pandemic recession much faster than anyone had anticipated.
Now, many economists expect consumer inflation to remain elevated at least through this year, with demand outstripping supplies in numerous areas of the economy.
And the Fed has radically changed course. As recently as September, Fed policymakers had been divided over whether to raise rates even once this year. But last month, the central bank signalled that it expects to raise its short-term benchmark rate, now pinned near zero, three times this year in an effort to quell inflation. And many private economists expect as many as four Fed rate hikes in 2022.
“If we have to raise interest rates more over time,” Powell told the Senate Banking Committee on Tuesday, “we will.”
Much of the surge is actually a consequence of healthy economic trends. When the pandemic paralysed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31 per cent annual rate in last year’s April-June quarter.
Everyone braced for more misery. Companies cut investment. Restocking was postponed. A brutal recession ensued.
But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fuelled by vast infusions of government aid and emergency intervention by the Fed, which slashed interest rates, among other things.
By spring, the roll-out of vaccines had emboldened consumers to return to restaurants, bars, shops and airports. Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings – a near record 10.6 million in November – or buy enough supplies to meet customer orders.
As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became snarled. Costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic.
But critics, including former US Treasury Secretary Lawrence Summers, blamed in part President Joe Biden’s US$1.9-trillion coronavirus relief package, with its US$1,400 cheques to most households, for overheating an economy that was already sizzling on its own.