Explainer: why US inflation is so high, and when could it be lower

WASHINGTON (AP) — Another month, another four-decade high for inflation.

For the 12 months ending March, consumer prices rose 8.5%. It was the sharpest year-on-year jump since 1981, surpassing February’s mark of 7.9%, a 40-year high.

Even if you throw away food and energy prices – which are notoriously volatile and prices have gone up a lot – so-called core inflation jumped 6.5% over the past 12 months. It was also the fastest such jump in four decades.

Consumers have felt the lack of everyday routine. Gasoline has grown an average of 48% over the past year. Airline tickets are up 24%, men’s suits up about 15%, beckon 18%.

The Federal Reserve never expected inflation this severe or persistent. Back in December 2020, policymakers at the Fed projected that consumer inflation would remain below their 2% annual target and end 2021 at around 1.8%.

Yet after a mere thought for decades, high inflation re-established itself with brutal speed last year. In February 2021, the government’s consumer price index was trading just 1.7% above the level a year ago. From there, year-over-year growth accelerated — 2.6% in March, 4.2% in April, 5% in May, 5.4% in June.

By October, the figure was 6.2%, by November 6.8%, by December 7%.

For months, Fed Chair Jerome Powell and some others portrayed higher consumer prices as only “transient” – the result, primarily, of shipping delays and temporary shortages of supplies and workers as the economy swelled from the pandemic slump. It turned faster than anyone could have guessed. Now, most economists expect inflation to pick up well into the next year, with demand exceeding supply in many sectors of the economy.

So the Fed has fundamentally changed course. Last month, it raised its benchmark short-term rate by a quarter-point and expects to continue increasing it aggressively through 2023. In doing so, the Fed is decisively moving away from ultra-low rates that helped revive recovery from the economic downturn as well as boost consumer prices.

The Fed is making a high-risk bet that it can slow the economy enough to trigger a recession without weakening it enough to rein in inflation. The overall economy is healthy, with a strong job market and extremely low unemployment. But many economists say they worry that the Fed’s continued credit tightening will lead to an economic slowdown.

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What is causing the spike in inflation?

Good news – mostly. When the pandemic crippled the economy in the spring of 2020 and began lockdowns, businesses closed or hours cut and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output fell at a record 31% annual rate in the April-June quarter of 2020.

Everyone was ready for more suffering. Companies cut investments and suspended stockings. A severe recession ensued.

But instead of sinking into a prolonged recession, the economy staged an unexpectedly encouraging recovery, fueled by a huge influx of government aid and emergency intervention by the Fed, which among other things slashed rates. By the spring of last year, the rollout of vaccines had encouraged consumers to return to restaurants, bars, shops, airports and entertainment venues.

Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings or buy enough supplies to fulfill customer orders. As business returned, the port and freight yard could no longer handle the traffic. Global supply chain seized.

Costs jumped as demand increased and supply fell. And companies found they could pass those high costs on to consumers in the form of higher prices, many of whom managed to pile up savings during the pandemic.

Critics have criticized, in part, President Joe Biden’s $1.9 trillion coronavirus relief package, with checks for $1,400 in most households, for heating up an economy that was already burning on its own. Convicted. Many others argued that the Fed kept rates near zero for too long, lent fuel to runaway spending and increased prices in stocks, homes and other assets.

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how long will it last?

High consumer price inflation can endure as long as companies struggle to meet consumer demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and 560,000 a month so far this year — means Americans can continue to splurge on everything from lawn furniture to electronics. .

Many economists expect inflation to remain well above the Fed’s 2% annual target this year. But higher prices may provide relief. The jammed-up supply chain is starting to show some signs of improvement, at least in some industries. The Fed’s pivot from easy money policies toward an anti-inflationary policy could ultimately dampen consumer demand. There will be no repeat of last year’s COVID relief checks from Washington. Inflation itself is reducing purchasing power and may force some consumers to reduce spending.

At the same time, new COVID variants could cloud the outlook – either by outbreaks that force factories and ports to shut down and disrupt supply chains or by keeping people at home and supplying goods. reduce demand.

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How are high prices affecting consumers?

The strong job market is pushing up workers’ wages, though not enough to offset higher prices. Hourly earnings for private sector workers fell 2.7% last month compared to a year ago, the 12th consecutive decline, the Labor Department says, taking into account higher consumer prices.

There are exceptions: Wages rose 8% after inflation for hotel workers and 4% for restaurant and bar workers in March from a year earlier.

Meanwhile, partisan politics is affecting the way Americans view the threat of inflation. Republicans with a Democrat in the White House are more likely than Democrats to say that inflation is having a negative effect on their personal finances, according to a survey of consumer sentiment conducted by the University of Michigan.

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