A crucial indicator of inflation is that prices are rising at their fastest pace in 40 years, and above what economists expected, in the latest unpleasant surprise for the White House and the Fed. ), after a year sacrificed to consumers.
January’s consumer price index figures, released on Thursday, show prices rose 7.5% from a month ago last year, up from the 7.2% projected in a Bloomberg survey. On a monthly basis, the increase was 0.6%.
It’s a fast pace by historical standards, and while it’s lower than the biggest monthly high recorded in 2021, this is yet another indicator that has exceeded economists’ expectations.
Excluding food and fuel prices – which fluctuate widely from month to month – inflation rose by 6%, its fastest pace since 1982.
Analysts anticipate that inflation will drop significantly in 2022. Many predict that it will end the year close to 3%. But economists have also repeatedly predicted that the price spike would quickly disappear in 2021, and have seen those projections negated as soaring demand for products collided with problems in global supply chains that were unable to ramp up production quickly enough.
Meanwhile, price increases are taking a toll on consumers’ wallets. January’s inflation was driven by food, electricity and housing costs, according to the Labor Statistics Service.
Economic officials have expressed more humility in their inflation expectations in recent months, especially at a time when ports remain congested, rents and restaurant prices are on the rise and wages are rising — factors that could help keep heated inflation.
High inflation has been a political problem for the White House because rising prices are weighing on household incomes and dampening the effects of a strong labor market with solid wage growth, which makes consumers feel pessimistic.
The situation also prompted the Fed to put aside its patient stance on monetary policy, which was intended to foster a rapid economic recovery from the pandemic, and included keeping interest rates as low as possible. Investors now expect central bank officials to raise interest rates six times this year as part of their effort to slow the economy and contain rising prices.
“Adopting the right monetary policy in this environment requires humility, and recognizing that the economy evolves in unexpected ways,” Jerome Powell, the Fed’s chairman, told a news conference last month.
The Fed is targeting an average annual inflation of 2% over time, although it sets that average based on a different inflation gauge, which is also high but has not risen as sharply.
The new figures “underline our position that a rapid cyclical acceleration of inflation is under way, and given exceptionally tight labor market conditions, it is unlikely to ease for the foreseeable future,” said Andrew Hunter, senior economist for the US market at consultancy Capital Economics, in a research note.
While Hunter said inflation is likely to decline this year, the figures indicate that “it is likely to remain well above the Fed’s target for some time to come.”
The factors that underlie inflation appear to be gaining strength. Price increases in 2021 were driven heavily by supply chain problems, which have driven new and used car and furniture prices to drastic increases. While this remains a major factor in the rise in overall inflation, other areas are also fueling a rapid rise.
Primary residential rents, which account for a good portion of inflation and tend to align more with economic conditions than unusual trends, rose 0.5% in January from a month earlier, a slight acceleration. Other housing costs continued to rise at a steady and noticeable pace.
Amid rising costs for housing and other services, economic officials expect supply chains to start catching up this year. That would allow commodity prices to moderate their rise or even fall — which would reduce pressure on overall inflation.
It is unclear, however, how quickly this will happen. Protests in Canada disrupted traffic on a key road transport route and hampered the delivery of components to auto assembly lines. Even if this isn’t a major disruption, some industry experts don’t predict a big drop in car prices this year.
“The pace of growth in vehicle prices — those crazy numbers we saw in 2021 — should start to slow,” said Charlie Chesbrough, senior economist at Cox Automotive. But demand remains robust and “we are very far behind the production end.”
While the White House has adopted policies that can help combat high inflation at the margins — freeing up oil from strategic reserves, and plans to put armed forces veterans into jobs in the labor-prone trucking industry —, the Fed’s primary mission is to slow demand in order to keep prices under control.
Fed officials have signaled that they will start raising interest rates in March. Higher interest rates can slow consumer and business spending by making it more expensive to finance a car or house or buy machinery. The authorities have also hinted that they will soon begin to reduce the volume of bonds held on their balance sheet, which should raise long-term borrowing costs and further cool the economy.
The Fed’s monetary policy response, coupled with a slow return to more normal business conditions, is expected to slow price advances in the coming months.
Consumers have also been purchasing goods at an unusually fast pace, but recent data indicates they may be returning to higher spending on services, the pattern that previously prevailed.
Still, the wage increases could raise the risk that inflation will remain uncomfortably high this year. Last week’s employment figures showed that average hourly pay rose rapidly — and much more than economists had expected. Companies may be able to offset rising labor costs with productivity gains, but if they don’t, they may pass the costs on to consumers to protect their profit margins.
Also, if consumers are earning more, they might be able to spend more on primary needs — like rent. If house prices continue to rise, this could help keep inflation high, as rents account for a good portion of the indicator.
That said, corporate profits at the moment look very strong and productivity is high, which could give companies room to absorb higher wage costs. And in recent decades, the correlation between rising wages and inflation has not been strong.
Some economists even worry that the Fed might act too aggressively, slowing the economy at a time when price advances would be starting to lose steam on their own.
“My concern is that they go overboard — that they’re too sensitive to wage growth,” said Ryan Sweet, who heads Moody’s Analytics real-time economic valuations. “This isn’t going to be easy.”
Predicting economic trends has been a challenge after state and local lockdowns were put in place to control the pandemic, and as the virus continues to disrupt usual economic patterns. On the one hand, job creation is plentiful and workers seem to have found more power to negotiate wages and working conditions. On the other hand, the speed of price increases has been a constant surprise.
Much like economic policymakers, companies are expressing uncertainty about when the rapid rise in prices should fade away.
“I wish we could predict when this inflation will slow down,” Brian Niccol, chief executive of restaurant chain Chipotle Mexican Grill, said in an interview with Bloomberg News this week. “But unfortunately, we’re not getting any signs that she’s going to slow down.”
Biden says inflation data shows Americans’ budgets are under pressure
US President Joe Biden said January’s consumer price index data was a reminder that Americans’ budgets were under real pressure, adding that his administration was using “all the tools” it needed. available to face the issue.
“We’ve been using all the tools at our disposal, and while today is a reminder that Americans’ budgets are being stretched in ways that create real stress on kitchen tables, there are also signs that we will rise to the challenge.” Biden said in a statement.
Biden also said analysts project inflation to decline by the end of 2022. The president added that his administration’s policies had led to a decline in new jobless claims, which he described as a sign of “real progress”. .
US consumer prices rose sharply in January, leading to the highest annual rate of inflation in 40 years, fueling speculation in financial markets about a 50 percentage point increase in interest rates by the Federal Reserve next month.
Translation by Paulo Migliacci. with Reuters
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