For months, many economists have sent a reassuring message that rising consumer prices, the lack of action for generations in the United States, will not last long. When the economy shifts from virus-related turmoil to near normal, it will prove “temporary” in soothing words from Federal Reserve Chairman Jerome Powell and White House officials.
Still, inflation has subsided, as any American who bought a carton of milk, a gallon of gas, or a used car knows. And economists are now expressing a more disappointing message. It does not exceed.
The government announced on Wednesday that the consumer price index has risen 6.2% from a year ago. This is the largest 12-month rise since 1990.
“It’s a big blow to the temporary story,” said Jason Furman, the Obama administration’s chief economic adviser. Maintaining a bright red pace. “
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And the impact of the sticker hits where the family tends to feel it most. For example, at the breakfast table, bacon prices have risen 20% over the past year, and egg prices have risen almost 12%. Gasoline surged 50%. Buying a washer or dryer will bring you back 15% more than it was a year ago. Secondhand car? 26% or more.
Wages for many workers are skyrocketing, but not enough to keep up with prices. Last month, the average hourly wage in the United States actually fell 1.2% compared to October 2020, after taking inflation into account.
Wells Fargo economists are terribly joking that the CPI (Consumer Price Index) of the Ministry of Labor needs to stand for “Consumer Price Index.” ..
Price pressures are increasing pressure on the Fed to move faster from its long-standing monetary easing policy. And it poses a threat to President Joe Biden, Democrats in Congress, and their ambitious spending plans.
What is the cause of the price surge?
Much of it is the flip side of the very good news. The US economy collapsed as COVID-19 struck, a blockade took place in the spring of 2020, businesses closed or shortened business hours, and consumers stayed home as a health precaution. Employers have cut 22 million jobs. Economic output plummeted at a record 31% annual rate in the April-June quarter of last year.
Everyone prepared for more misery. Companies reduce their investment. Replenishment has been postponed. And the brutal recession continued.
However, instead of falling into a prolonged recession, the economy has made an unexpected and remarkable recovery. This was boosted by huge government spending and a series of Fed emergencies. By spring, the deployment of vaccines has brought consumers back to restaurants, bars and shops.
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Suddenly, companies had to scramble to meet demand. They couldn’t hire fast enough to fill the job (nearly 10.4 million in August) and couldn’t buy enough supplies to fill the customer’s order. .. Due to the surge in business, ports and freight yards were unable to handle traffic. The global supply chain has been disrupted.
The cost has gone up. And companies have realized that during a pandemic, many can pass on those higher costs in the form of higher prices to consumers who have managed to absorb large amounts of savings.
“A significant portion of the inflation we see is the inevitable consequence of getting out of the pandemic,” said Harvard Kennedy School economist Ferman.
However, Farman suggested that the wrong policy also played a role. Policymakers were so enthusiastic about stopping the economic collapse that they “systematically underestimated inflation,” he said.
“They poured kerosene on the fire.”
According to Mr. Ferman, a flood of government spending, including President Joe Biden’s $ 1.9 trillion coronavirus rescue package, sent a $ 1,400 check to most households in March, overstimulating the economy.
“Inflation in the United States is much higher than in Europe,” he said. “Europe is experiencing the same supply shocks and supply chain problems as the United States, but they are almost unstimulating. It was. “
Biden admitted in a statement Wednesday that “infrastructure damages American notebooks and reversing this trend is my number one priority,” but his one, including spending on roads, bridges and ports. A bottleneck that said a trillion dollar infrastructure package would help facilitate supply.
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How long will it last?
Consumer price inflation will continue as long as companies struggle to keep up with the tremendous demand for consumer goods and services. The resurrected job market (employers add 5.8 million jobs this year) means Americans can keep jumping on everything from lawn furniture to new cars. In addition, supply chain bottlenecks are showing no signs of resolution.
“The demand side of the US economy remains remarkable and companies will continue to enjoy the luxury of passing prices,” said Rick Leader, chief investment officer for BlackRock’s global fixed income.
Megan Greene, Chief Economist at the Crawl Institute, suggested that inflation and the economy as a whole would eventually return to near-normal conditions.
Regarding inflation, he said, “I think it will be temporary, but economists must be very honest about defining temporary things, and I think this will continue easily for another year.” rice field.
“We need a lot of humility to talk about how long this will last,” Ferman said. “I think we’ll be with us for a while. Inflation will drop from this year’s blazing pace, but it’s still very high compared to the historical standards we’re used to.”
Will the 1970s-style “stagflation” be revived?
Soaring consumer prices have raised concerns about a return to “stagflation” in the 1970s. That was when inflation coincided with a high unemployment rate, contrary to what traditional economists thought was possible.
But today’s situation looks very different. The unemployment rate is relatively low and households are in good financial condition overall. The Conference Board has found that consumer inflation expectations last month were the highest since July 2008. But consumers didn’t seem to be so worried. market.
“I feel the benefits outweigh the negatives, at least for the time being,” said Lynn Franco, senior director of economic indicators at The Conference Board.
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Economic growth is expected to recover in the final quarter of 2021 after slowing from July to September in response to the highly contagious delta variant.
“Most economists expect growth to accelerate in the fourth quarter,” Green said. “Therefore, it does not imply that we are facing both growth tanking and higher inflation. We are just facing higher inflation.”
What should policy makers do?
Pressure is on the Fed, which is tasked with keeping inflation under control to control prices.
“They need to stop telling us that inflation is temporary, start worrying more about inflation, and act in a way that is consistent with what they are worried about,” Ferman said. rice field. “
Powell has announced that the Fed will begin cutting monthly bond purchases, which it launched last year, as an emergency measure to boost the economy. In September, Fed officials also predict that the Fed’s benchmark interest rates will rise from near zero, a record low, by the end of 2022. This is much earlier than expected a few months ago.
But if rapid inflation continues, the Fed may be forced to accelerate its schedule. Investors expect the Fed to raise rates at least twice next year.
“We’ve been fighting non-existent inflation since the 1990s, and we’re talking about fighting real-life inflation,” said Diane Swonk, chief economist at accounting and consulting firm Grant Thornton.
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APEconomics writer Christopher Rugaber contributed to this report.
Copyright © 2021 By AP communication. all rights reserved.
Consumer Price Index 2021: Why US Inflation Is So High And When Prices Stop Soaring
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