WASHINGTON: Inflation is starting to look like that unpredictable — and unwanted — houseguest that just won’t go away.
For months, many economists carried a reassuring message that rising consumer prices, something that had been missing in action in America for a generation, would not last long.
It would prove “transient,” in the soothing words of Federal Reserve Chairman Jerome Powell and White House officials, as the economy shifted from virus-related chaos to something closer to normalcy.
Yet as any American who has bought a carton of milk, a gallon of gas, or a used car can tell you, inflation has settled. And economists are now delivering a more discouraging message: Higher prices are likely to last well into next year, if not beyond.
On Wednesday, the government said its consumer price index rose 6.2% from a year earlier – the biggest 12-month jump since 1990.
“It’s a big blow against the ephemeral narrative,” said Jason Furman, who served as the top economic adviser in the Obama administration.
“Inflation is not slowing down. It is maintaining red-hot momentum.”
And the sticker shock is hitting where families feel it most. At the breakfast table, for example: Bacon prices have risen 20% over the past year, egg prices up about 12%. Petrol has risen by 50%.
Buying a washing machine or dryer will set you back 15% more than a year ago. second hand car? 26% more.
Although wages have risen sharply for many workers, it is not nearly enough to keep up with prices.
Last month, the average hourly wage in the United States, after accounting for inflation, actually fell 1.2% compared to October 2020.
Wells Fargo economists joked that the Labor Department’s CPI _ Consumer Price Index _ should stand for “Consumer Pain Index.”
Unfortunately for consumers, especially low-wage families, all this coincides with their higher spending needs just ahead of the holiday season.
The price drop is adding to pressure on the Fed to move away from years of easy-money policies more quickly. And it poses a threat to President Joe Biden, a congressional Democrat, and his ambitious spending plans.
What is the reason for the rise in prices?
Much of this is just the flip side of the very good news. Slammed by Covid-19, the US economy collapsed in the spring of 2020 as lockdowns went into effect, businesses closed or hours cut and consumers stayed home as a health precaution. Employers cut 22 million jobs.
Economic output fell at a record-breaking 31% annual rate in the April-June quarter last year.
Everyone was ready for more suffering. Companies cut investments. Recharge has been turned off. And a great recession ensued.
Yet, instead of sinking into a prolonged recession, the economy staged an unexpectedly encouraging recovery, driven largely by government spending and emergency steps by the Fed.
By spring, the rollout of vaccines had encouraged consumers to return to restaurants, bars and stores.
Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to plug job openings — nearly 10.4 million records in August — or buy enough supplies to fill customer orders.
As business returned, the port and freight yard could no longer handle the traffic. The global supply chain collapsed.
Cost increased. And companies found they could pass those high costs on to consumers in the form of higher prices, many of whom had managed to stave off a ton of savings during the pandemic.
“A large part of the inflation we’re seeing is the inevitable result of coming out of the pandemic,” said Furman, a Harvard Kennedy School economist.
Furman suggested, however, that misguided policy also played a part. He added that policymakers were so inclined to prevent 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, along with $1,400 checks to most households in March – decimated the economy, Furman said.
“Inflation is much higher in the United States than in Europe,” he said.
“Europe is going through the same supply shock as the United States, the same supply chain issues. But they didn’t provide nearly as much impetus.”
In a statement on Wednesday, Biden acknowledged that “inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me.”
But he said a $1 trillion infrastructure package, including spending on roads, bridges and ports, would help ease supply bottlenecks.
How long will it last?
Consumer price inflation will likely persist as long as companies struggle to keep up with consumers’ singular demand for goods and services.
A resurgent job market — employers added 5.8 million jobs this year — means Americans can continue to splurge on everything from lawn furniture to new cars. And supply chain bottlenecks show no sign of clearing.
“The demand side of the US economy will be something to watch out for,” says Rick Ryder, chief investment officer for Global Fixed Income at BlackRock. And companies will continue to have the luxury of passing on prices.
Megan Green, chief economist at the Crawl Institute, suggested that inflation and the overall economy would eventually return to near normal.
“I think it will be ‘temporary,'” she said of inflation. “But economists have to be very honest about how transitory is defined, and I think it could easily go on for another year.”
“We need a lot of humility in talking about how long this lasts,” Furman said.
“I think it’s been with us for a while. Inflation is going to come down at a faster rate this year, but it’s still going to be a lot higher than historical norms.”
Will we suffer the return of 1970s-style ‘stagflation’?
The rise in consumer prices has raised fears of a return to the “inflation” of the 1970s. That was when high prices coincided with high unemployment, contrary to what traditional economists thought.
Yet today the situation looks very different. Unemployment is relatively low, and families overall are in a good financial position.
A business research group, the Conference Board, found that consumer inflation expectations last month were the highest since July 2008. But consumers didn’t seem all that concerned: On optimism about the job, the board’s confidence index soared anyway.
“For the time being, at least, they think the benefits outweigh the negatives,” said Lynn Franco, the conference board’s senior director of economic indicators.
After slowing economic growth from July to September in response to the highly contagious delta variant, it is believed to bounce back in the last quarter of 2021.
“Most economists are expecting growth to pick up in the fourth quarter,” Green said. “So it doesn’t suggest that we are facing both growth and high inflation. We are only facing high inflation.”
What should policy makers do?
There is pressure on the Fed, which is accused of controlling inflation, to control prices.
“They have to stop telling us that inflation is temporary, start worrying more about inflation, then act accordingly to be concerned,” Furman said. “We’ve seen a little bit of that, but only a little bit.”
Powell has announced that the Fed will begin reducing monthly bond purchases that began last year as an emergency measure to try to boost the economy.
In September, Fed officials also predicted they would raise the Fed’s benchmark interest rate to near zero by the end of 2022 from its record low — much earlier than they had predicted a few months earlier.
But increasingly high inflation, if it persists, could force the Fed to accelerate that timetable; Investors expect at least two Fed rate hikes next year.
“We’ve been fighting non-existent inflation since the 1990s,” said Diane Swonk, chief economist at accounting and consulting firm Grant Thornton, “and now we’re talking about fighting an inflation that’s real.”
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