Inflation rate climbs to 40-year high
December prices up 7% from a year earlier, putting pressure on consumers, Biden, Fed
Inflation climbed to its highest level in 40 years at the end of 2021, a troubling development for President Joe Biden and economic policymakers as rapid price gains erode consumer confidence and cast a shadow of uncertainty over the economy’s future.
The consumer price index climbed 7% in the year through December, and 5.5% after stripping out volatile prices such as food and fuel. The last time the main inflation index eclipsed 7% was 1982.
Policymakers have spent months waiting for inflation to fade, hoping supply chain problems might ease and allow companies to catch up with booming consumer demand. Instead, continued waves of the coronavirus have locked down factories, and shipping companies have struggled to work through extended backlogs as consumers continue to buy foreign goods at a rapid clip. Forecasters expect price gains to fade this year, but how quickly that will happen is unclear, posing a big economic policy question for Biden and the Federal Reserve.
“Obviously 7% is a pretty big sticker shock,” said Omair
Sharif, founder of the research firm Inflation Insights. He added that inflation could plateau around 7%, but will take time to ease back from that peak. It is likely to end 2022 lower, but still above the near-2% level that policymakers prefer.
“It’s just a lot of wood to chop to get down to anything approaching the good old days,” Sharif said.
The fresh data released Wednesday showed the cost of used cars and food both increasing quickly, and provided further evidence that
price gains are broadening beyond just a few pandemic-disrupted categories. Rents continue to pick up at a solid pace, and restaurant meals are more expensive, possibly a sign that recent wage increases are beginning to feed into higher prices as employers look to cover higher labor costs.
That price increases are becoming more widespread — and creeping into areas that are not so directly affected by the pandemic — is a worrisome development for economic policymakers, who are now poised to respond. Federal Reserve officials
have indicated that they expect to raise interest rates several times this year as they try to cool demand and the economy in an attempt to prevent the pandemic-era burst in prices from becoming a permanent feature of the economic landscape.
Jerome Powell, the Fed chair, emphasized Tuesday that the central bank was shifting into inflationfighting mode after nearly two years of trying to prop up the pandemic-stricken economy by keeping interest rates near zero. Officials expect price gains to slow considerably, but are closely watching how quickly that happens as they consider the pace of rate increases. Investors expect four rate
moves this year, and policymakers penciled in three as of their December meeting.
“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” Powell told lawmakers during a Senate Banking Committee hearing Tuesday.
Fed officials target a separate inflation index, the personal consumption expenditures measure. The CPI data released Wednesday feeds into those figures and are released earlier, which is why they draw investor and policymaker attention.
Controlling inflation is primarily the Fed’s job, but rising prices are a political liability for Biden. Democrats
are heading into a challenging midterm election year when they will battle to retain control of Congress. Republicans have increasingly accused Biden and his party of driving prices higher by flooding the economy with too much money in 2021, including a third round of stimulus checks, and the president’s poll numbers are showing dissatisfaction among voters.
Inflation concerns are also complicating Biden’s ability to pass his sprawling climate and social policy bill. Sen. Joe Manchin, D-W.Va., holds a key vote given the razor-thin majority his party holds in the Senate. Manchin has cited high prices as one of the
reasons he won’t back the legislation.
Biden and his advisers have tried to put a positive spin on the numbers, while acknowledging the pain that price increases are causing consumers. They point to the economy’s quick rebound from the pandemic-induced 2020 recession, including falling levels of unemployment. The administration is also trying to use its executive powers to alleviate supply chain problems and cool off costs — pushing ports to extend their opening hours and releasing strategic petroleum reserves to help bring fuel prices down — though most economists say that those moves only help around the edges.
On Wednesday, the administration highlighted that the monthly gain in headline inflation had ticked down slightly — to 0.5% from 0.8% in November — though the monthly rise is still unusually rapid.
“This report underscores that we still have more work to do, with price increases still too high and squeezing family budgets,” Biden said in a statement following the report.
Gas prices moderated somewhat in December, providing some relief for consumers, but “food at home” costs have been growing steadily more expensive and prices for meals at limited-service restaurants surged by 8% in 2021.