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Administration and Fed officials alike have maintained that rapid inflation eventually should fade. But they have had to revise how quickly that might happen: Supply chains remain badly snarled, and demand for goods is holding up and helping to fuel higher prices.
As wages begin to rise in many sectors amid labor shortages, there are reasons to expect that some businesses might charge their customers more to cover climbing worker costs. October’s data did nothing to alleviate that growing sense of unease.
“It’s a big number,” Michelle Meyer, head of U.S. economics at Bank of America, said of the October data. “What’s striking is the broadening of the inflationary pressures.”
Many factors pushed inflation higher last month. Shortages of used and new cars have sent prices skyrocketing, supply chain issues have made furniture costlier, labor shortages are raising some service-industry price tags, and rents are rising. In the headline data, food and fuel prices have picked up sharply.
Officials have avoided overreacting to an inflation surge driven by supply chain problems, worried that doing so would hurt the economy unnecessarily.
If the trends persist, they likely will come under pressure to hasten their plans to pull back economic support by ending their stimulative bond-buying program and raising interest rates from rock bottom sooner and more quickly.
Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said inflation had been “eye popping” but cautioned that the Fed also is paying attention to the many jobs still missing from the labor market.
In an interview with Bloomberg Television Wednesday, Daly said it was too soon to suggest that officials would need to speed their process of slowing — or tapering — monthly bond purchases beyond the pace the Fed announced last week. Tapering that buying is a precursor to rate increases.
“It would be very premature to start asking whether we should quicken the taper,” Daly said.
Markets took note of the inflation figures, with stocks slowly sinking throughout the day. A key measure of the bond market’s expectations for inflation over the next five years rose to a new high of 3.10% shortly after the report was issued.
That means investors expected inflation to average about 3% a year for the next five years, essentially, far higher than in the decade before the pandemic hit.
They also increasingly bet that the Fed will respond: Market pricing suggests investors have come to more heavily expect a rate increase by the central bank’s meeting in June 2022.
For policy makers and investors, it is difficult to predict when price jumps might moderate. Many are intertwined with the reopening of businesses from state and local lockdowns meant to contain the coronavirus; the economy has never gone through such a widespread shutdown and restart before.
But officials have become wary that uncomfortably high inflation might linger. Consumers have been increasing their expectations for future price gains. Households expecting to face climbing grocery, department store and gas bills might demand pay raises — setting off an upward cycle in which wages and prices push one another upward.
Supply chain experts have been warning that some of the shortages driving up costs might get worse before they get better, especially headed into the holiday season.
At the Fed, some officials are warning that the central bank may need to pull back economic support faster. Doing that could cool down prices by tempering demand but would also weaken the job market.
That would be a heavy price to pay, and a needless one if the inflation jump fades on its own.
“We don’t think it’s time yet to raise interest rates,” Jerome Powell, the Fed chairman, said at a recent news conference. “There is still ground to cover to reach maximum employment.”
Fed officials acknowledge that high prices can be hard for consumers to absorb, especially for goods and services that households consume regularly.