WASHINGTON (AP) – Inflation is starting to look like the unexpected – and unwanted – householder who just does not want to go.
For several months, many economists had given a reassuring message that a rise in consumer prices, something that had been lacking in the United States for a generation, would not last long. That would prove to be “transient,” in the reassuring words of Federal Reserve Chairman Jerome Powell and White House officials as the economy shifted from virus-related chaos to something closer to normalcy.
But as any American who has bought a carton of milk, a gallon of gasoline, or a used car could tell you, inflation has fallen into place. And economists are now sending 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 ago – the biggest 12-month jump since 1990.
“It’s a big blow to the transient narrative,” said Jason Furman, who served as the top economic adviser to the Obama administration. “Inflation is not declining. It is keeping a red-hot pace.”
And the brand shock hits where families tend to feel the most. At the breakfast table for example: Bacon prices have risen 20% over the past year, egg prices almost 12%. Gasoline has risen 50 per cent. If you buy a washer or dryer, you will put yourself 15% more back than it would have done a year ago. Used cars? 26% more.
Although wages have risen markedly for many workers, it is not near enough to keep up with prices. Last month, the average hourly wage in the US, after taking inflation into account, actually fell 1.2% compared to October 2020.
Economists at Wells Fargo are gloomily joking that the Labor Department’s CPI – Consumer Price Index – should stand for “Consumer Pain Index”. .
The price squeeze is escalating the pressure on the Fed to shift faster away from years of easy money policies. And that poses a threat to President Joe Biden, the Democratic Democrats, and their ambitious spending plans.
WHAT CAUSED THE PRICE GIRL?
Much of it is the back cover of very good news. Due to COVID-19, the U.S. economy collapsed in the spring of 2020, when shutdowns took effect, businesses closed or cut hours, and consumers stayed home as a health precaution. Employers laid off 22 million jobs. Economic output fell at a record 31% annual rate in last year’s April-June quarter.
Everyone was preparing for more misery. Companies are cutting back on investment. Reconstruction was postponed. And a brutal recession followed.
But instead of sinking into a protracted downturn, the economy staged an unexpectedly tantalizing recovery, driven by massive government spending and a host of emergencies from the Fed. By spring, the rollout of vaccines had encouraged consumers to return to restaurants, bars and shops.
Suddenly, companies had to work hard to meet demand. They could not hire fast enough to close job openings – nearly a record 10.4 million in August – or buy enough supplies to fill customer orders. When business roared back, ports and shipyards could not handle the traffic. Global supply chains were tightened.
The cost increased. And companies found that they could pass on the higher costs in the form of higher prices to consumers, many of whom had managed to suck a host of savings away during the pandemic.
“A significant portion of the inflation we see is the inevitable result of getting out of the pandemic,” said Furman, now an economist at Harvard Kennedy School.
Furman, however, suggested that misunderstood politics also played a role. Politicians were so intent on averting an economic collapse that they “systematically underestimated inflation,” he said.
“They poured kerosene on the fire.”
A flood of public 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 much higher in the United States than it is in Europe,” he noted. “Europe is going through the same supply shocks as the United States, the same supply chain problems. But they did not do nearly as much stimulus.”
In a statement Wednesday, Biden acknowledged that “inflation is hurting Americans’ wallets, 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.
HOW LONG WILL IT BE?
Consumer price inflation is likely to continue as long as companies struggle to keep up with consumers’ huge demand for goods and services. A resurgent job market – employers have added 5.8 million jobs this year – means Americans can continue to throw out everything from lawn furniture to new cars. And supply chain bottlenecks show no signs of clearing.
“The demand side of the U.S. economy will continue to be something to see,” says Rick Rieder, Chief Investment Officer for Global Interest Rates at Blackrock, “and companies will continue to have the luxury of going through prices.”
Megan Greene, chief economist at the Kroll Institute, suggested that inflation and the overall economy would eventually return to something closer to normal.
“I think it will be ‘transient,'” she said of inflation. “But economists need to be very honest when it comes to defining transient, and I think this could easily last another year.”
“We need a lot of humility to talk about how long this lasts,” Furman said. “I think it’s been with us for a while. The inflation rate is going to fall from this year’s windy pace, but it will still be very, very high compared to the historical norms we have been used to. ”
DO WE SUFFER A BACK OF THE 1970’S STYLE ‘STAGFLATION’?
The rise in consumer prices has raised the specter of a return to “stagflation” in the 1970s. That was when higher prices coincided with high unemployment despite what conventional economists thought was possible.
Yet today’s situation looks very different. Unemployment is relatively low and overall households are in good shape financially. The Conference Board, a business research group, found that consumer inflation expectations last month were the highest they had been since July 2008. But consumers did not seem so worried: the board’s confidence index rose anyway due to optimism about the job market.
“For the time being, at least, they feel the benefits outweigh the negatives,” said Lynn Franco, conference board senior director of economic indicators.
Economic growth, after slowing from July to September in response to the highly contagious delta variant, is expected to return in the last quarter of 2021.
“Most economists expect growth to accelerate in the fourth quarter,” Greene said. “So it does not indicate that we are facing both an increase in growth and higher inflation. We are just facing higher inflation.”
WHAT SHOULD POLITICIANS DO?
The pressure is on the Fed, which is tasked with keeping a lid on inflation, to control prices.
“They need to stop telling us that inflation is transient, start becoming more concerned about inflation and then act in a way that is consistent with being concerned,” Furman said. “We’ve seen a bit of it, but only a little bit.”
Powell has announced that the Fed will begin reducing its monthly bond purchases, which it began last year, as an emergency measure to try to boost the economy. In September, Fed officials also predicted that they would raise the Fed’s benchmark rate from its record low near zero by the end of 2022 – much earlier than they had predicted a few months earlier.
But sharply higher inflation, if it continues, could force the Fed to speed up this schedule; investors expect at least two rate hikes from the Fed next year.
“We’ve been fighting non-existent inflation since the 1990s,” said Diane Swonk, chief economist at auditing and consulting firm Grant Thornton, “and now we’re talking about fighting inflation that is real.”
AP Economics writer Christopher Rugaber contributed to this report.