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EXPLANATOR: Why is US inflation so high and when could it come down?

WASHINGTON (AP) – Inflation is starting to look like an unexpected – and unwelcome – guest who just doesn’t want to leave.

For several months, many economists have sounded reassuring: the surge in consumer prices that the US has been missing for a generation will not last long. This will prove to be “temporary” as the economy shifts from the chaos of viruses to something closer to normal, according to soothing words from Federal Reserve Chairman Jerome Powell and White House officials.

However, as any American who buys a carton of milk, a gallon of gasoline, or a used car can tell you, inflation has stabilized. And now economists are giving a more discouraging message: higher prices are likely to continue next year, if not beyond.

On Wednesday, the government said the consumer price index rose 6.2% from last year, the largest 12-month jump since 1990.

“This is a big blow to the transitory storytelling,” said Jason Fuhrman, who was the Obama administration’s top economic adviser. “Inflation is not slowing down. He maintains a fast pace. ”

And the shock of the stickers comes where families tend to feel it the most. For example, at the breakfast table: prices for bacon have increased by 20% over the past year, and for eggs by almost 12%. Gasoline has risen in price by 50%. Buying a washer or dryer will cost you 15% more than a year ago. Used cars? 26% more.

Although the wages of many workers have risen sharply, this is not enough to keep up with prices. Last month, the inflation-adjusted average hourly wage in the U.S. actually fell 1.2% from October 2020.

Wells Fargo economists grimly joke that the Labor Department’s CPI – the Consumer Price Index – should mean the Consumer Pain Index. Unfortunately for consumers, especially households with lower wages, this all coincides with their higher spending needs right before the holiday season. …

Lower prices are increasing pressure on the Fed to move away from years of easy money policies more quickly. And it poses a threat to President Joe Biden, the Democrats in Congress and their ambitious spending plans.

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WHAT CAUSED THE PRICE INCREASE?

For the most part, this is the flip side of some very good news. The U.S. economy hit by COVID-19 collapsed in the spring of 2020 when restrictions came into effect, businesses closed or reduced hours of operation, and consumers stayed at home as a health precaution. Employers have cut 22 million jobs. Production fell by a record 31% year on year in April-June last year.

Everyone was preparing for new suffering. Companies are cutting back on investments. Replenishment has been postponed. A violent recession followed.

However, instead of plunging into a protracted recession, the economy recovered unexpectedly quickly, aided by huge government spending and a series of emergency measures from the Fed. By the spring, the spread of vaccines prompted consumers to return to restaurants, bars and shops.

Suddenly, businesses were struggling to keep up with demand. They couldn’t hire fast enough to fill jobs – nearly a record 10.4 million in August – or buy enough materials to fill customer orders. When business returned to normal, ports and freight stations could not handle the traffic. Global supply chains started to get nervous.

The costs have gone up. And companies have found that they can pass these higher costs in the form of higher prices to consumers, many of whom have managed to throw off a ton of savings during the pandemic.

“Much of the inflation we are seeing is the inevitable result of emerging from the pandemic,” said Furman, now an economist at the Harvard Kennedy School.

However, Furman suggested that faulty policies also played a role. Politicians were so determined to prevent economic collapse, he said, that they “systematically underestimated inflation.”

“They poured kerosene over the fire.”

The flood of government spending, including President Joe Biden’s $ 1.9 trillion coronavirus relief package, with his $ 1,400 checks for most households in March, has overstimulated the economy, Furman said.

“Inflation in the US is much higher than in Europe,” he said. “Europe is experiencing the same supply shocks as the US, the same supply chain problems. But they weren’t that much stimulating. ”

In a statement on Wednesday, Biden admitted that “inflation is hurting the wallets of Americans, and changing that trend is my top priority.” But he said his $ 1 trillion infrastructure package, including spending on roads, bridges and ports, would help ease supply. narrow places.

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HOW LONG WILL IT LAST?

Consumer price inflation is likely to continue as long as companies struggle to meet the colossal consumer demand for goods and services. A resurgent job market – employers added 5.8 million jobs this year – means Americans can continue to spend money on everything from lawn furniture to new cars. And bottlenecks in the supply chain won’t go away.

“Demand in the US economy will continue to be the focus,” says Rick Reeder, chief investment officer of global fixed income at Blackrock, “and companies will still have the luxury of controlling prices.”

Megan Green, chief economist at the Kroll Institute, suggested that inflation and the economy in general will eventually return to something closer to normal.

“I think it will be temporary,” she said of inflation. “But economists have to be very honest in defining a transition, and I think it could easily last another year.”

“We need to humbly talk about how long this will last,” Furman said. “I think this has been with us for a while. The inflation rate will decline compared to the rapid pace of this year, but it will still be very, very high compared to the historical rates we are used to. ”

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CAN WE RETURN A 1970s-style SPREADER?

The rise in consumer prices has led to the danger of a return to 1970s stagflation. This was when higher prices coincided with higher unemployment rates, contrary to what traditional economists thought possible.

However, the current situation looks very different. Unemployment is relatively low and overall households are in good financial health. The Conference Board, a business research group, found consumer inflation expectations last month were the highest since July 2008. But consumers didn’t look so worried: The Board Confidence Index still rose amid optimism about work. market.

“At least for the time being, they feel the advantages outweigh the disadvantages,” said Lynn Franco, senior director of economic performance at the Conference Board.

After a slowdown from July to September due to the highly contagious variant of the delta, economic growth is expected to return to normal in the last quarter of 2021.

“Most economists expect growth to pick up in the fourth quarter,” Green said. “So this does not mean that we are facing both slower growth and higher inflation. We just faced higher inflation. ”

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WHAT SHOULD POLICIES DO?

The pressure is on the Fed, which must contain inflation in order to control prices.

“They need to stop telling us that inflation is transitory, start worrying more about inflation, and then act in a way that makes them worry,” Furman said. “We saw a little of this, but not much.”

Powell announced that the Fed will begin cutting its monthly bond purchases, begun last year, as an emergency measure to try to lift the economy. In September, Fed officials also predicted that they would raise the Fed’s benchmark interest rate from a record low close to zero by the end of 2022 – much earlier than they had predicted a few months earlier.

But a sharp rise in inflation, if it persists, could force the Fed to accelerate its schedule; investors expect at least two Fed rate hikes next year.

“We’ve been fighting non-existent inflation since the 1990s,” said Diane Swank, chief economist at accounting and consulting firm Grand Thornton, “and now we’re talking about fighting real inflation.”

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AP Economics writer Christopher Rugaber contributed to this report.

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