December 10, 2021

AP NOTE: Why is U.S. inflation so high and when can it fall

WASHINGTON (AP) – Inflation has started to look like an unexpected and unwanted home visitor.

For months, many economists have delivered a convincing message that rising consumer prices, which have not existed in the U.S. for a generation, will not last long. Federal Reserve Chairman Jerome Powell and White House officials said the consolation proved to be “transient” as the economy moved from a virus-related disorder to something closer to normal.

Any American who buys a carton of milk, a gallon of gasoline, or an old car can tell you that inflation has stabilized. And economists are now saying the news is even more depressing: higher prices could continue into next year. not outside.

On Friday, the government backed the news with a report that the consumer price index rose 6.8 percent last month from a year earlier – the biggest jump in 12 months since 1982.

And the sticker blow happens where families feel it the most. At the breakfast table, for example: The price of bacon increased by 21% last year, the price of eggs by 8%. Gasoline rose 58 percent. Equipping your living room, dining room, or kitchen will give you 14% more return than a year ago. Used machines? 31% each.

READ MORE: How will rising prices affect people and what does it say about the economy

Although wages have risen sharply for many workers, this is almost not enough to keep prices down. Last month, the average hourly wage in the United States fell 2.4 percent from November 2020, taking into account inflation.

Wells Fargo economists have joked that the Department of Labor’s CPI – the consumer price index – should mean the “consumer pain index”. Unfortunately, for consumers, especially low-income households, all of this comes down to their high costs ahead of the holiday season.

Price crises are putting pressure on the Fed to move faster from a multi-year easy monetary policy. And that threatens President Joe Biden, the Democrats in Congress, and their big spending plans.

What caused the rise in prices?

Much of it is the opposite of very good news. The U.S. economy, condemned by COVID-19, collapsed in the spring of 2020 as blockades took effect, businesses closed or working hours cut, and consumers stayed home as a health measure. Employers cut 22 million jobs. Economic production fell to a record 31 percent year-on-year in the April-June quarter of last year.

Everyone was prepared for more unhappiness. Companies have reduced investment. Restoration stopped. And a brutal decline began.

However, instead of plunging into a prolonged recession, the economy has made an unexpected rapid recovery due to large government spending and the Fed’s many emergency measures. By spring, the release of vaccines will encourage consumers to return to restaurants, bars and shops.

Suddenly, businesses were forced to struggle to meet demand. In October, they were unable to get to work quickly enough to fill nearly 11 million jobs or purchase enough materials to fill customer orders. When the business went back, ports and carriers could not cope with the congestion. Global supply chains rumbled.

READ MORE: How did the supply chain drive current inflation and why can it stay here

Costs have increased. And companies have found that they can transfer these high costs to consumers in the form of higher prices, many of which have managed to save a ton during the pandemic.

“Much of the inflation we’re seeing is the inevitable outcome of the pandemic,” said Jason Furman, an economic adviser at Harvard’s Kennedy School in the Obama White House.

Furman said wrong policies also played a role. He said politicians were so keen to prevent the economic crisis that they “systematically underestimated inflation.”

“They poured kerosene on the fire.”

Furman said government spending, including President Joe Biden’s $ 1.9 trillion anti-coronavirus aid package, sent $ 1,400 checks to most households in March.

“Inflation in the United States is much higher than in Europe,” he said. “Europe, like the United States, is experiencing supply shortages and supply chain problems,” he said. But they were almost not encouraged. “

Biden acknowledged that inflation is hurting Americans ’pockets, and said keeping inflation a priority. But he said his $ 1 trillion infrastructure package, including spending on roads, bridges and ports, would help ease supply constraints and therefore inflationary pressures.

How long will it take?

As companies struggle to meet the huge demand of consumers for goods and services, consumer price inflation may continue. The revitalized labor market – employers added 6.1 million jobs this year – means Americans will continue to buy everything from lawn furniture to new machines.

“The demand side of the U.S. economy will remain something that stands out,” said Rick Rider, chief investment officer at Blackrock’s Global Fixed Income, “and companies will continue to enjoy the luxury of a price transition.”

READ MORE: How the pandemic has affected the economy, from empty shelves to high prices

Meghan Green, chief economist at the Kroll Institute, suggested that inflation and the overall economy would eventually return to normal.

“I think it’s going to be‘ temporary ’,” he said of inflation. “But economists need to be very honest in determining the transition period, and I think it could easily go another year.”

“We need a lot of humility to talk about how long this will take,” Furman said. “I think it’s been a while,” he said. The inflation rate will fall sharply this year, but it will still be very, very high compared to the historical norms we have studied. “

Are we suffering from the return of “stagflation” as we did in the 1970s?

Rising consumer prices have boosted perceptions of a return to “stagflation” in the 1970s. Contrary to what traditional economists thought was possible, high prices coincided with high unemployment.

But today the situation looks very different. Unemployment is relatively low, and households are in good financial shape. The conference board, a business research group, found last month that consumer inflation expectations were the highest since July 2008. But their overall confidence remains high.

Economic growth is expected to recover in the last quarter of 2021 after slowing from July to September in response to the highly contagious delta option.

“Most economists expect growth to accelerate in the fourth quarter,” Green said. “That doesn’t mean we’re facing slower growth and higher inflation. We’re just facing higher inflation.”

What should politicians do?

Holding inflation, pressure on the Fed to control prices.

The central bank has begun to counter inflationary pressures by cutting its $ 120 billion-a-month bond purchases to $ 15 billion a month. These purchases, which began last summer, were aimed at maintaining long-term interest rates to stimulate borrowing and spending.

But as inflationary pressures continue longer than Powell Fed expected, the central bank is expected to announce next week that it will accelerate bond purchases.

This will allow the Fed to start raising its key short-term interest rate in the first half of next year. Since March 2020, when the coronavirus led to a deep recession in the economy, the figure has been almost zero. As soon as the Fed predicts that it will not do so by the end of 2023, it will raise rates much earlier than expected this summer.

“We’re fighting inflation that hasn’t existed since the 1990s,” said Diane Swank, chief economist at accounting and consulting firm Grant Thornton, “and now we’re talking about fighting real inflation.”

AP Economics author Christopher Rugaber contributed to this report.

Nation World News is the fastest emerging news website covering all the latest news, world’s top stories, science news entertainment sports cricket’s latest discoveries, new technology gadgets, politics news, and more.


Related Stories