WASHINGTON. Inflation jumped at its fastest pace in nearly 40 years last month, rising 7% from a year ago, pushing household spending, eating up wage gains, and putting pressure on President Joe Biden and the Federal Reserve to decide which has become the biggest threat to the US economy.
In 2021, prices for cars, gasoline, food and furniture rose sharply as part of a rapid recovery from the pandemic recession. Huge infusions of government aid and ultra-low interest rates have helped spur demand for goods, and vaccinations have given people the confidence to dine out and travel.
As Americans increased spending, supply chains remained tight due to labor and raw material shortages, adding to price pressures.
The Labor Department said Wednesday that inflation, which excludes food and gas price volatility, jumped 5.5% in December, also the highest in decades. Headline inflation is up 0.5% since November, up from 0.8% in the previous month.
Price increases may slow further as supply chain problems ease, but most economists say inflation will not return to pre-pandemic levels anytime soon.
“Inflationary pressures in the US are showing no signs of easing,” said James Knightley, chief international economist at financial services firm ING. “He hasn’t been that tall since Thatcher and Reagan. We could be close to the peak, but there is a risk that inflation will remain high for longer. ”
High inflation is not just a problem for the United States. In 19 European countries that use the euro currency, inflation rose 5% in December compared to last year, the largest increase on record.
Companies large and small are adapting as best they can.
Nicole Pomier, owner of a bakery in the Minneapolis area, said she plans to hike prices for cookies due to rising cost of ingredients.
Her base cookie was 99 cents apiece, while premium versions sold for $ 1.50 apiece. But Pomie said she would have to raise the prices of her basic cookies to the premium price.
“We have to make money,” she said. “We do not want to lose our clients. But I think we could.
Businesses trying to hire employees have received higher wages, but rising prices for goods and services have wiped out this gain in income for many Americans. Low-income families have felt this the most, and polls show inflation has begun to crowd out even the coronavirus as a public issue.
High inflation has forced President Biden to take a defensive stance. His administration, echoing Fed officials, initially suggested that the price hike would be temporary. Now that inflation has persisted, Biden and some Democrats in Congress have begun to blame big corporations. They say meat producers and other industries are taking advantage of the pandemic’s shortage to boost prices and profits. But even some center-left economists disagree with this diagnosis.
On Wednesday, the president issued a statement arguing that the fall in gas prices in December and the smaller rise in food prices indicate progress.
One trend that experts fear is the spiral of rising wages and prices. This happens when workers seek higher wages to offset higher costs, and then companies increase costs to cover those higher wages. Federal Reserve Chairman Jerome Powell told the Senate on Tuesday that he has yet to see evidence that wages in general are driving prices up in the economy.
According to economists, the biggest factor in inflation is the mismatch between supply and demand. Used car prices have risen more than 37% in the past year because a shortage of semiconductors prevents car companies from producing enough new cars. Supply chain constraints have driven furniture prices up nearly 14% over the past year.
Shoppers are feeling the pressure everywhere, from the gas station to the grocery store.
Vicki Bernardo Hill, 65, an occupational therapist in Gaithersburg, Maryland, says she no longer puts excess canned food, cereal boxes or baked goods in a basket at Giant Food.
“I try to stick to my list and buy discounted items,” Hill said.
Since she couldn’t find a good deal for a used car, Hill recently bought a new Mazda, spending $ 5,000 more than she planned.
Inflation could come down as the omicron wave fades and Americans shift most of their spending to services such as travel, dining out and going to the movies. This will reduce the demand for goods and help clean up supply chains.
But some of the higher prices, such as rents, may turn out to be more sticky. Rental expenses, which have accelerated since the summer, rose 0.4% in December, up for the third straight month. This is important because housing costs account for one third of the government’s consumer price index.
Powell told Congress that if the need arises for a more aggressive fight against high inflation, the Federal Reserve is ready to accelerate the interest rate hike it plans to begin this year. The Fed’s benchmark short-term rate, currently pegged to zero, is expected to be raised at least three times this year.
Raising rates will make home or car loans more expensive and therefore help cool the economy.
Some economists and members of Congress fear that the Fed has acted too slowly to stave off inflation, and that this could eventually lead to even sharper rate hikes, which could damage the economy.
Republicans in Congress and even some liberal economists say Biden deserves at least part of the blame for high inflation, arguing that the bailout package he pushed through Congress last March significantly stimulated an already strengthening the economy.
AP authors Paul Wiseman and Josh Boak in Washington DC, Di-Anne Durbin in Detroit, and Anne D’Innocenzio in New York contributed to this report.