Consumers, Fed and Biden under pressure as inflation hits40-year high
Inflation jumped at its fastest pace in nearly 40 years last month, a 7% spike from a year earlier that is increasing household expenses, eating into wage gains and heaping pressure on President Joe Biden and the Federal Reserve to address what has become the biggest threat to the U.S. economy.
Prices rose sharply in 2021 for cars, gas, food and furniture as part of a rapid recovery from the pandemic recession. Vast infusions of government aid and ultra-low interest rates helped spur demand for goods, while vaccinations gave people confidence to dine out and travel.
As Americans ramped up spending, supply chains remained squeezed by shortages of workers and raw materials and this magnified price pressures.
The Labor Department reported Wednesday that a measure of inflation that excludes volatile food and gas prices jumped 5.5% in December, also the highest in decades. Overall inflation rose 0.5% from November, down from 0.8% the previous month.
Price gains could slow further as snags in supply chains ease, but most economists say inflation won’t fall back to pre-pandemic levels anytime soon.
“U.S. inflation pressures show no sign of easing,” said James Knightley, chief international economist at the financial services company ING. “It hasn’t been this high since the days of Thatcher and Reagan. We could be close to the peak, but the risk is that inflation stays higher for longer.”
High inflation isn’t only a problem for the U.S. In the 19 European countries that use the euro currency, inflation rose 5% in December compared with a year earlier, the biggest increase on record.
Companies large and small are adapting as best they can.
Nicole Pomije, a bakery owner in the Minneapolis area, said she plans to raise prices for cookies because of surging ingredient costs.
Her basic cookies were priced at 99 cents each, while premium versions were selling for $1.50 each. But Pomije said she will have to jack up the prices of her basic cookies to the premium price.
“We have to make money,” she said. “We don’t want to lose our customers. But I think we might.”
Businesses struggling to hire have hiked pay, but rising prices for goods and services have eroded those income gains for many Americans. Lower-income families have felt it the most, and polls show that inflation has started displacing even the coronavirus as a public concern.
The United States hasn’t seen anything like it since the early 1980s. Back then, Fed Chair Paul Volcker responded by pushing interest rates to painful levels — the prime rate for banks’ best customers hit 20% in 1980 — and sent the economy into a deep recession. But Volcker succeeded in taming inflation that had been running at doubledigit year-over-year levels for much of 1979-1981.
High inflation has put President Biden on the defensive. His administration, echoing officials at the Fed, initially suggested that price increases would be temporary. Now that inflation has persisted, Biden and some congressional Democrats have begun to blame large corporations. They say meat producers and other industries are taking advantage of pandemic-induced shortages to drive up prices and profits. But even some leftof-center economists disagree with that diagnosis.