Inflation rate at 31-year high
November 17, 2021
We’ve all been feeling the price pinch when we shop for groceries or fill our gas tanks. Rising costs are a concern for everyone.
Last week I saw a map accompanying a Wall Street Journal (WSJ) article that showed where inflation rates are the highest. The Midwest and the South are the hardest hit while people living on either of the U.S. coasts are feeling it the least.
The WSJ headline stated: “U.S. Inflation Hit 31-Year High in October as Consumer Prices Jump 6.2%.”
The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s.
The Labor Department said the consumer-price index (CPI) – which measures what consumers pay for goods and services – increased in October by 6.2% from a year ago. That was the fastest 12-month pace since 1990 and the fifth straight month of inflation above 5%.
The CPI is based on the prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-say living. Economists sometimes remove energy and food costs out of the CIP, and if you did, that would put the rate at 4.6%. But energy (heating and gasoline) and food are not optional expenses.
We are not at an all-time high, but it still hurts to pay those bills. Bloomberg points out, “U.S. consumers faced the biggest jump in their energy bills in more than a decade last month, with costs soaring for electricity, natural gas and fuel oil as cooler weather approaches.”
Electricity prices rose 6.5% from the same month a year ago. Other energy sources rose even faster. Fuel oil rose 59%, and costs for propane and kerosene rose 35%.
Inflation Explained
Inflation is starting to look like that unexpected – and unwanted – houseguest who just won’t leave, Paul Wiseman writes in an article for the Associated Press.
For months, many economists had sounded a reassuring message that a spike in consumer prices, something that had been missing in action in the U.S. for a generation, wouldn’t stay long. It would prove “transitory,’’ in the soothing words of Federal Reserve Chair Jerome Powell and White House officials, as the economy shifted from virus-related chaos to something closer to normalcy.
On Wednesday, the government said its consumer price index soared 6.2% from a year ago — the biggest 12-month jump since 1990.
“It’s a large blow against the transitory narrative,’’ said Jason Furman, who served as the top economic adviser in the Obama administration. “Inflation is not slowing. It’s maintaining a red-hot pace.’’
And the sticker shock is hitting where families tend to feel it most. At the breakfast table, for instance: Bacon prices are up 20% over the past year, egg prices nearly 12%. Gasoline has surged 50%. Buying a washing machine or a dryer will set you back 15% more than it would have a year ago. Used cars? 26% more.
Although pay is up sharply for many workers, it isn’t nearly enough to keep up with prices. Last month, average hourly wages in the United States, after accounting for inflation, actually fell 1.2% compared with October 2020.
Economists at Wells Fargo joke grimly that the Labor Department’s CPI – the Consumer Price Index – should stand for “Consumer Pain Index.’’ Unfortunately for consumers, especially lower-wage households, it’s all coinciding with their higher spending needs right before the holiday season.
The price squeeze is escalating pressure on the Fed to shift more quickly away from years of easy-money policies. And it poses a threat to President Joe Biden, congressional Democrats and their ambitious spending plans.
What Caused the Price Spikes?
Much of it is the flipside of very good news. Slammed by COVID-19, the U.S. economy collapsed in the spring of 2020 as lockdowns took effect, businesses closed or cut hours and consumers stayed home as a health precaution. Employers slashed 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in last year’s April-June quarter.
Everyone braced for more misery. Companies cut investment. Restocking was put off. And a brutal recession ensued.
Yet instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by massive government spending and a bevy of emergency moves by the Fed. By spring, the rollout of vaccines had emboldened consumers to return to restaurants, bars and shops.
Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to plug job openings — a near record 10.4 million in August — or buy enough supplies to fill customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became snarled.
Costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic.
“A sizeable chunk of the inflation we’re seeing is the inevitable result of coming out of the pandemic,’’ said Furman, now an economist at the Harvard Kennedy School.
Furman suggested, though, that misguided policy played a role, too. Policymakers were so intent on staving off an economic collapse that they “systematically underestimated inflation,” he said.
“They poured kerosene on the fire.’’
A flood of government spending — including President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households in March — overstimulated the economy, Furman said.
How Long Will It Last?
Consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ prodigious demand for goods and services. A resurgent job market — employers have added 5.8 million jobs this year — means that Americans can continue to splurge on everything from lawn furniture to new cars. And the supply chain bottlenecks show no sign of clearing.
Megan Greene, chief economist at the Kroll Institute, said, “I think it it will be ‘transitory’. But economists have to be very honest about defining transitory, and I think this could last another year easily.’’
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