WASHINGTON (AP) – Inflation is starting to look like that unexpected – and unwanted – guest who just doesn’t want to leave.

For months, many economists had been sending out a reassuring message that a surge in consumer prices, something the United States had lacked for a generation, would not last long. It would prove to be “transient,” in the soothing words of Federal Reserve Chairman Jerome Powell and White House officials, as the economy shifts from chaos linked to the virus to something closer to normal.

Yet, as any American who’s bought a carton of milk, a gallon of gasoline, or a used car might tell you, inflation has set in. And economists are now expressing a more disheartening message: The price hike will likely last next year, if not beyond.

On Wednesday, the government said its consumer price index climbed 6.2% from a year ago – the biggest 12-month jump since 1990.

“It’s a blow to the transitional narrative,” said Jason Furman, who was the Obama administration’s senior economic adviser. “Inflation is not slowing down. It’s maintaining a frantic pace. ”

And the sticker shock hits where families tend to feel it the most. At the breakfast table, for example: Bacon prices are up 20% from last year, egg prices by almost 12%. Gasoline jumped 50%. Buying a washer or dryer will cost you 15% more than a year ago. Used vehicles? 26% more.

Although wages are rising sharply for many workers, they are nowhere near enough to keep up with prices. Last month, the average hourly wage in the United States, after accounting for inflation, actually fell 1.2% from October 2020.

Wells Fargo economists gravely joke that the Department of Labor’s CPI – the Consumer Price Index – should stand for “Consumer Pain Index.” Unfortunately for consumers, especially low-income households, this all coincides with their higher spending needs just before the holiday season. .

The price suppression intensifies the pressure on the Fed to move away from years of easy money policies more quickly. And it poses a threat to President Joe Biden, the Democrats in Congress, and their ambitious spending plans.

What caused the price spikes?

This is largely the flip side of very good news. Struck by COVID-19, the U.S. economy collapsed in the spring of 2020 as closures took effect, businesses shut down or cut hours, and consumers stayed at home as a health precaution. Employers cut 22 million jobs. Economic output plunged at a record annual rate of 31% in the April-June quarter of last year.

Everyone has prepared for more misery. Companies are reducing their investments. Replenishment has been postponed. And a brutal recession ensued.

Yet instead of slipping into a prolonged downturn, the economy staged an unexpected recovery, fueled by massive government spending and a host of emergency measures from the Fed. In the spring, the vaccine rollout encouraged consumers to return to restaurants, bars and shops.

Suddenly, businesses had to scramble to meet demand. They couldn’t hire quickly enough to fill job openings – a record close to 10.4 million in August – or buy enough supplies to fill customer orders. As business picked up, ports and freight yards could no longer handle the traffic. Global supply chains have become harassed.

The costs have gone up. And companies have found they can pass those higher costs on in the form of higher prices to consumers, many of whom had managed to save a ton in savings during the pandemic.

“A significant part of the inflation that we are seeing is the inevitable result of exiting the pandemic,” said Furman, now an economist at Harvard Kennedy School.

Furman suggested, however, that this misguided policy also played a role. Policymakers were so determined to avoid 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 program, with his $ 1,400 checks to most households in March – overstimulated the economy, said Furman.

“Inflation is much higher in the United States than it is in Europe,” he noted. “Europe is going through the same supply shocks as the United States, the same supply chain problems. But they didn’t give that much stimulus. ”

In a statement released Wednesday, Biden acknowledged that “inflation is hurting Americans’ portfolios and reversing this trend is a top priority for me.” bottlenecks.

How long will it last?

Consumer price inflation is likely to continue as long as businesses strive to meet consumer demand for goods and services. A resurgent job market – employers created 5.8 million jobs this year – means Americans can continue to splurge on everything from patio furniture to new cars. And supply chain bottlenecks show no signs of abating.

“The demand side of the US economy will continue to be something to see,” says Rick Rieder, investment manager for global fixed income at Blackrock, “and companies will continue to afford the luxury of passing on prices. . “

Megan Greene, chief economist at the Kroll Institute, suggested that inflation and the overall economy would eventually return to something more normal.

“I think it will be ‘transient’,” she said of inflation. “But economists have to be very honest when they define the transient, and I think it could easily go on for another year. “

“We need a lot of humility to say how long this lasts,” Furman said. “I think he’s been with us for a while. The inflation rate is going to come down from the lightning pace this year, but it’s still going to be very, very high by historical standards we’re used to. ”

Are we going to experience a 1970s-style “stagflation” return?

Soaring consumer prices raised the specter of a return to the ‘stagflation’ of the 1970s. It was then that rising prices coincided with high unemployment, in defiance of what mainstream economists thought. possible.

Yet the situation today looks very different. Unemployment is relatively low and households are generally in good financial health. The Conference Board, a research group on business, found that consumer inflation expectations last month were the highest they had been since July 2008. market.

“For now, at least, they feel the pros outweigh the cons,” said Lynn Franco, senior director of economic indicators at the Conference Board.

Economic growth, after slowing from July to September in response to the highly contagious delta variant, is expected to rebound in the last quarter of 2021.

“Most economists expect growth to accelerate in the fourth quarter,” Greene said. “So that does not suggest that we are facing both slower growth and higher inflation. We are just facing higher inflation. ”

What should policy makers do?

The pressure is on the Fed, responsible for controlling inflation, to control prices.

“They need to stop telling us inflation is transient, start worrying more about inflation, and then act in a way consistent with worry,” Furman said. “We’ve seen a little of it, but only a little. “

Powell announced that the Fed will start cutting monthly bond purchases it started last year as an emergency measure to try to get the economy going. In September, Fed officials also predicted that they would hike the Fed benchmark interest rate from its all-time low near zero by the end of 2022 – much sooner than they would expect. had predicted it a few months earlier.

But significantly higher inflation, if it persists, could force the Fed to accelerate this timetable; investors expect at least two rate hikes from the Fed next year.

“We’ve been battling inflation that hasn’t existed since the 1990s,” said Diane Swonk, chief economist at accounting and consulting firm Grant Thornton, “and now we’re talking about fighting real inflation.”


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