WASHINGTON (AP) – Inflation rebounded in December at its fastest year-on-year rate in nearly four decades, surging 7% and boosting consumer spending, offsetting recent wage increases and increasing pressure on President Joe Biden and the Federal Reserve to tackle the problem. … is becoming an increasingly central economic concern of Americans.
Prices rose during the recovery from the pandemic recession as Americans increased spending on goods such as cars, furniture and appliances.
These increased purchases clogged ports and warehouses and exacerbated shortages of semiconductors and other parts. Gasoline prices, while declining slightly from November to December, surged last year, in part because Americans have driven more driving in recent months after cutting back travel and commuting at the start of the pandemic.
The Labor Department said Wednesday that excluding volatile food and gas prices, so-called benchmark prices rose 0.6% from November to December, slightly more than the 0.5% rise from October to November. On an annualized basis, staple food prices jumped 5.5% in December, the fastest rise since 1991.
Rising prices have offset the healthy wage increases that many Americans have received, making it harder for households, especially low-income families, to afford basic expenses. Polls show that inflation has begun to crowd out even the coronavirus as a public issue, clearly showing the political threat it poses to President Joe Biden and the Democrats in Congress.
Much of consumer inflation continues to be driven by the supply-demand mismatch caused by the pandemic. The value of used cars rose 3.5% from November to December and is up more than 37% from a year ago. As new car production is constrained by a shortage of semiconductors, consumers are buying up used cars, increasing their cost.
Product shortages in U.S. grocery stores have also escalated in recent weeks, as new challenges such as the omicron option and harsh weather have exacerbated the supply chain and labor shortages that have plagued retailers since the coronavirus pandemic began.
Chairman Jerome Powell told Congress on Tuesday that the Federal Reserve is ready to accelerate the rate hike it plans to begin this year if it sees fit to curb high inflation. Fed officials have calculated that they will raise the base short-term rate three times this year, which is currently pegged to zero. Many economists are forecasting as many as four Fed rate hikes in 2022.
This rate hike is likely to increase the cost of borrowing for home and car purchases, as well as for business loans, which could slow the economy. The rate hike also marks a dramatic change in policy from Fed policymakers, who were divided back in September over whether to raise rates at least once this year. The Fed is also rapidly discontinuing monthly bond purchases that were intended to lower long-term interest rates to stimulate borrowing and spending.
However, the Fed’s quick turnaround did not clear up questions from many former Fed officials, economists and some senators about whether the Fed was too slow to end its ultra-low interest rate policy in the face of accelerating inflation – and put the economy at risk as a result.
In his speech to Congress on Tuesday, Powell said the Fed mistakenly believed supply chain bottlenecks that helped drive commodity prices up would not last as long as they were. Once the supply chains are unraveled, he said, prices will fall again.
However, for now, supply problems persist, and while there are signs that they are waning in some industries, Powell admitted that progress has been limited. He noted that many cargo ships remain docked off the ports of Los Angeles and Long Beach, the largest in the country, pending unloading.
As the Biden administration faced public dissatisfaction with rising inflation, President Joe Biden said his administration’s investments in ports, roads, bridges and other infrastructure would help reduce inflation by weakening some of the tangled supply chains.
In the meantime, many restaurants have passed some of the higher labor and food costs onto their customers in the form of higher prices. So far, many consumers are willing to pay more. Jin Lee, CEO of Darden Restaurants, which owns Olive Garden and other brands, recently told investors that this is “the toughest inflationary environment we’ve seen in years.”
The company said its food and beverage costs jumped 9% during the quarter, and its hourly wage costs rose nearly 9% as it raised wages to attract workers. Darden said it, in turn, raised prices by 2% during the quarter and expects to raise them by 4% over the next two quarters to compensate. Rick Cardenas, president and chief operating officer of the company, said these higher prices have not yet driven consumer demand down.