Inflation climbed to a 40-year high in late 2021, a worrying development for President Biden and economic policymakers as rapid price hikes eroded consumer confidence and cast a shadow of uncertainty over the future of the economy.
The consumer price index rose 7 percent for the year to December, and 5.5 percent after excluding volatile prices such as food and fuel. The last time the main inflation index exceeded 7 percent was in 1982.
Policymakers have spent months waiting for inflation to subside in hopes that supply chain problems would ease and allow businesses to keep up with booming consumer demand. Instead, sustained waves of the coronavirus have crippled factories and shipping companies have struggled to work their way through lengthy backlogs as consumers continue to rush to buy foreign goods. Forecasters expect gains to moderate this year, but how quickly that will happen is unclear, raising a major policy question for Mr. Biden and the Federal Reserve.
“Obviously 7 percent is a pretty big sticker shock,” said Omair Sharif, founder of research firm Inflation Insights. He added that inflation could stagnate at around 7 percent but would take time to bounce back from that peak. It will likely end 2022 lower, but still above the nearly 2 percent level favored by policymakers.
“It’s just a lot of wood to chop to achieve anything close to the good old days,” Mr Sharif said.
New data released on Wednesday showed both used car and grocery costs rising rapidly, providing further evidence that price gains are spreading beyond just a few pandemic-disrupted categories. Rents continue to rise at a solid pace and meals in restaurants are more expensive, possibly a sign that recent wage increases are starting to help higher prices as employers try to cover higher labor costs.
That price hikes are becoming more widespread — and spreading into areas not as directly affected by the pandemic — is a worrying development for economic policymakers, who are now poised to respond. Federal Reserve officials have indicated they expect to hike interest rates several times this year as they seek to cool demand and the economy to prevent pandemic-era price hikes from becoming a permanent feature of the economic landscape.
Fed Chair Jerome H. Powell stressed on Tuesday that the central bank is moving into anti-inflation mode after nearly two years of trying to prop up the pandemic-hit economy by keeping interest rates near zero. Officials expect gains to slow significantly, but are watching closely how quickly this happens given the pace of rate hikes. Investors expect four rate hikes this year and policymakers set three at their December meeting.
Credit…George Etheredge for the New York Times
“If we see inflation sticking at high levels longer than expected, if we have to keep raising interest rates over time, then we will do that,” Mr Powell told lawmakers during a Senate Banking Committee hearing on Tuesday.
Fed officials target a separate inflation index, the measure of personal consumption spending. CPI data released on Wednesday feeds into these figures and is published earlier, which is why it is attracting the attention of investors and policymakers.
Controlling inflation is primarily the Fed’s job, but rising prices are a political obligation for Mr. Biden. Democrats face a challenging mid-election year in which they will struggle to retain control of Congress. Republicans have increasingly accused Mr. Biden and his party of driving up prices by flooding the economy with too much money in 2021, including a third round of stimulus checks, and the president’s poll numbers show dissatisfaction among the voters.
Inflation worries are also complicating Mr Biden’s ability to pass his sweeping climate and social policy bill. Senator Joe Manchin III, the West Virginia Democrat who holds a key vote given his party’s razor-thin control of the Senate, has cited high prices as one of the reasons he won’t support the legislation.
Mr. Biden and his advisers have sought to sway the numbers in a positive way while acknowledging the pain that price hikes are causing consumers. They point to the economy’s rapid recovery from the pandemic-induced recession in 2020, including falling unemployment figures. The government is also trying to use its executive powers to ease supply chain problems and contain costs — urging ports to extend their opening hours and freeing up strategic oil reserves to lower fuel prices — although most economists say those moves only help at the edges .
On Wednesday, the government highlighted that the monthly rise in headline inflation had eased slightly – to 0.5 percent from 0.8 percent in November – although that rise is still unusually fast.
“This report underscores that we have more work to do as price hikes are still too high and are squeezing family budgets,” Biden said in a statement after the release.
Politicians and economists initially hoped that the rapid gains in prices would fade quickly in 2021, and many still expect them to moderate over the course of 2022. However, economists are watching for a few factors that could cause prices to rise too quickly for comfort.
The cost of housing, based on the cost of renting an apartment, accounts for about a third of the consumer price index, so the fact that landlords are charging higher fees will matter for headline inflation.
“My gut feeling is that the pace of appreciation will be slower in 2022 than it was in 2021,” said Jeff Tucker, senior economist at Zillow. “But I don’t see rents actually going down or becoming more affordable.”
Global supply chains continue to experience disruptions, leading to shortages of parts and products and driving up costs for a wide range of consumer products.
The price of groceries rose 6.3 percent and the price of clothing rose 5.8 percent in the year to December. Used cars and trucks – together with new vehicles, a major factor behind price increases since last spring – rose by 37.3 percent. Automakers are struggling to source parts — particularly computer chips imported from Asia — delaying new vehicle production and driving demand for a limited supply of used vehicles.
More glitches might be in store. The Omicron variant of the coronavirus is causing labor shortages in factories, ports, trucking companies and warehouses in the United States and overseas. And recent lockdowns in China aimed at containing the coronavirus, inspired by the country’s continued imposition of a zero-tolerance policy on the pandemic, could exacerbate chip shortages, among other supply chain issues.
“If they stick to their zero-case doctrine, a global supply chain disaster is looming,” said Tinglong Dai, professor of operations management at Johns Hopkins University’s Carey Business School, of China.
There were early signs that shipping lanes and depleted inventories could be easing, but many companies say they’ve seen little improvement.
The price to ship a 40-foot container from Asia to the US West Coast hit $14,572 this week, down slightly from a peak of more than $20,000 in September, but still nearly 10 times higher than before two years, according to Freightos Group data.
The group’s data also showed that shipping times for ocean shipments from China to the United States stretched to a record 80 days in December, an 85 percent increase from 2019.
“Much of the turbulent nature of the supply chain that has been happening throughout the past year continues, and unfortunately there is not much relief in sight,” said Douglas Kent, executive vice president of strategy and alliances at the Association for Supply Chain Management .
That’s clear to Caroline McCroskey, 27, of Tulsa, Oklahoma, who heads up marketing for a furniture maker that imports pieces from China and Cambodia and sells them to major retailers. The company has seen sharp increases in costs as shipping container prices have skyrocketed.
“Cargo is bad enough, but we’ve seen a dramatic increase in leather hides and cloth,” along with other commodities, including steel and foam, she said. “No one is very optimistic that shipping costs will return to normal anytime soon.”
Persistently high inflation has shaken many Americans’ confidence in the economy, according to consumer surveys.
Economists and Wall Street analysts tend to focus on a price measure that excludes food and fuel costs because they fluctuate month-to-month, but these expenses matter to the household budget.
Gas prices softened somewhat in December, giving consumers some relief, but the cost of “eating at home” has risen steadily, with prices for meals in limited-service restaurants rising 8 percent in 2021.
Jon Willow, 55, of Interlochen, Michigan, has seen food costs skyrocket since the pandemic began — so much so that she and her partner have tried to break away from store-bought produce by canning vegetables from her garden and her chicken coop have heated in winter so that their chickens continue to produce eggs.
“We now have a no-food-left-behind policy in-house — we use everything,” she said, noting they had preserved tomatoes, squash and asparagus.
Sydney Ember contributed coverage.