by Christopher Rugaber
WASHINGTON (AP) – Inflation jumped last month at its fastest pace in nearly 40 years, a 7% increase from a year ago that is sagging household spending, eating into wage gains and stoking President Joe Biden and the Federal Reserve. There is increasing pressure on the reserve to decide what to address. has become the biggest threat to the US economy.
Prices for cars, gas, food and furniture rose sharply in 2021 as part of a rapid recovery from the pandemic slowdown. Massive investment in government aid and ultra-low interest rates helped drive demand for the goods, while vaccinations gave people the confidence to eat out and travel.
As Americans increased spending, shortages of workers and raw materials and this increased price pressure were squeezing the supply chain.
The Labor Department reported Wednesday that a measure of inflation that does not include volatile food and gas prices jumped 5.5% in December, the highest in decades. Overall inflation rose 0.5% since November, from 0.8% in the previous month.
Price gains may slow further as supply chain eases, but most economists say inflation will not return to pre-pandemic levels anytime soon.
“US inflationary pressures show no sign of easing,” said James Knightley, chief international economist at financial services company ING. “It hasn’t been that high since the days of Thatcher and Reagan. We may be closer to the peak, but the risk is that inflation will last longer.”
High inflation is not only a problem for the US. Among the 19 European countries that use the euro currency, inflation rose 5% in December from a year earlier, the biggest increase on record.
Companies big and small are doing their best.
Nicole Pomije, a bakery owner in the Minneapolis area, said she plans to raise prices for the cookies because of the rising cost of ingredients.
Her original cookies cost 99 cents each, while premium versions were selling for $1.50 each. But Pomije said it would have to raise the prices of its original cookies to a premium price.
“We have to make money,” she said. “We don’t want to lose our customers. But I think we can.”
Businesses struggling to make rent have increased wages, but rising prices of goods and services have reduced income benefits for many Americans. Low-income households have felt it the most, and surveys show that inflation has begun to displace the coronavirus as a public concern as well.
The United States has not seen anything like this since the early 1980s. Subsequently, Fed Chair Paul Volcker responded by pushing interest rates to painful levels – the prime rate for banks’ best customers reached 20% in 1980 – and sent the economy into a deep recession. But Volcker was able to overcome inflation, which had been running at double-digit year-on-year levels for most of 1979–1981.
High inflation has put President Biden on the defensive. His administration, echoing Fed officials, initially suggested the price hike would be temporary. Now that inflation remains in place, Biden and some congressional Democrats have begun to blame large corporations. He says meat producers and other industries are taking advantage of pandemic-induced shortages to drive up prices and profits. But some left-wing economists also disagree with that diagnosis.
On Wednesday, the president issued a statement arguing that the fall in gas prices in December and a modest increase in food costs showed progress.
One trend experts fear is the wage-price spiral. This happens when employees want a higher salary to compensate for the higher cost, and then companies inflate the cost further to cover that higher salary. On Tuesday, Federal Reserve Chairman Jerome Powell told a Senate panel that he had yet to find evidence that wages were driving up prices in the broader economy.
According to economists, the biggest driver of inflation is the mismatch between supply and demand. Used car prices have risen more than 37 per cent in the past one year as semiconductor shortages have prevented automakers from making enough new cars. Supply-chain bottlenecks have driven furniture prices up nearly 14% over the past year.
From the gas station to the grocery store, the shopkeepers are feeling the chill around them.
Vicki Bernardo Hill, 65, an occupational therapist in Gaithersburg, Maryland, says she no longer throws extra canned food, boxes of cereal or bakery items into her shopping cart at Giant Food stores.
“I’m trying to stick to my list and buy what’s on sale,” Hill said.
Because he couldn’t find a good deal on a used car, Hill recently bought a new Mazda, spending $5,000 more than he had planned.
Inflation could subside as the omicron wave fades and as Americans shift more of their spending to services such as travel, eating out and watching movies. This will reduce the demand for goods and help in clarifying the supply chain.
But some higher prices, such as rent, may prove more sticky. Rental costs, which have accelerated since the summer, rose 0.4% in December, the third consecutive monthly increase. This is important because the cost of housing is one-third of the government’s consumer price index.
Powell told Congress that if it becomes necessary to fight high inflation more aggressively, the Federal Reserve is prepared to accelerate interest rate hikes starting this year. The Fed’s benchmark short-term rate, which has now hovered near zero, is expected to rise at least three times this year.
An increase in rates will make it more expensive to borrow for a house or car, and therefore help to cool the economy.
Some economists and members of Congress fear that the Fed has acted too slowly to reduce inflation and that it could eventually force faster rate hikes that could damage the economy.
Republicans in Congress and even some liberal economists say Biden deserves at least some of the blame for the high inflation, arguing that the financial rescue package he pushed through Congress last March Extended further, it added significant stimulus to an already strong economy.
AP Writers Paul Wiseman and Josh Bock in Washington, D-Ann Durbin in Detroit and Anne D’Innocenzio in New York contributed to this report.