Here’s why inflation is so high and how long it could last


The relentless surge in inflation did not just persist in June. It accelerated.

For the 12 months to June, the government’s consumer price index climbed 9.1%, the fastest year-on-year jump since 1981.

And that was nothing compared to what energy prices did: Fueled by strong demand and Russia’s invasion of Ukraine, energy costs soared nearly 42 % over the past 12 months, the largest such increase since 1980.

Even if you throw out food and energy prices – which are notoriously volatile and have driven much of the price spike – so-called core inflation has soared 5.9% over the past year. .

Consumers have endured pain in daily routines. Unleaded gasoline has increased by 61% over the past year. Suits, jackets and coats for men, 25%, Airline tickets, 34%. Eggs 33%. Breakfast sausage, 14%.

Under President Jerome Powell, the Federal Reserve has never anticipated such severe or persistent inflation. Yet, after decades of being an afterthought, high inflation has reasserted itself with ferocious speed as shortages of labor and supplies are met with a propulsive increase in the demand for goods and services across the economy.

In February 2021, the consumer price index was only 1.7% above its level a year earlier. From there it accelerated – past 2% in March, past 4% in April and 5% in May. In December, consumer prices hit the 7% year-over-year mark. And so on: 7.5% in January, 7.9% in February. And the increases have topped 8% every month since March.

The United States has had worse inflation before, but not for many decades. The post-World War II inflation peak reached nearly 20% in 1947, due to the lifting of wartime price restrictions, supply shortages, and pent-up consumer demand. Inflation in the 1970s and early 1980s peaked at 14.8% in March 1980 before the Fed exorcised high prices with aggressive rate hikes that caused back-to-back sharp recessions in 1980 and 1981- 1982.

For months, Powell and a few others have called high inflation merely a “transitional” phenomenon as the economy rebounded from the pandemic recession faster than anyone expected. Not anymore. Today, most economists expect inflation to remain painfully high well beyond this year, with demand outstripping supply in many parts of the economy.

The Fed therefore radically changed course by imposing a succession of sharp rate hikes. The central bank is taking a risky bet that it can slow the economy enough to contain inflation without weakening it to the point of triggering a recession.

The overall economy looks healthy so far, with a robust job market and extremely low unemployment. But many economists warn that the Fed’s steady credit crunch will likely lead to a slowdown.

WHAT CAUSED THE PEAK INFLATION?

Good news – mostly. When the pandemic crippled the economy in the spring of 2020 and shutdowns began, businesses closed or reduced hours and consumers stayed home as a health precaution, employers cut 22 million breathtaking jobs. Economic output plunged at a record annual rate of 31% in the April-June quarter of 2020.

Everyone is preparing for more misery. Companies have reduced their investments and postponed restocking. A severe recession ensued.

But instead of sinking into a protracted slowdown, the economy staged an unexpectedly strong recovery, fueled by large injections of government aid and an emergency response from the Fed, which included cutting rates. In the spring of last year, the rollout of vaccines encouraged consumers to return to restaurants, bars, shops, airports and entertainment venues.

Suddenly, businesses had to scramble to keep up with demand. They couldn’t hire quickly enough to fill vacancies or buy enough supplies to meet customer orders. As business picked up, ports and freight yards could no longer handle the traffic. Global supply chains have seized up.

With rising demand and falling supplies, costs have jumped. And companies found they could pass those higher costs on in the form of higher prices to consumers, many of whom had managed to rack up savings during the pandemic.

Critics have partly blamed President Joe Biden’s $1.9 trillion coronavirus relief package, with his $1,400 checks to most households, of overheating an economy that was already sizzling from it. -same. Many others have placed more blame on supply shortages. And some have argued that the Fed has kept rates near zero for too long, fueling rampant spending and inflating the prices of stocks, homes and other assets.

IS HIGH INFLATION ONLY AFFECTING THE UNITED STATES?

Not by far. Prices are rising around the world, partly because of the Russian invasion of Ukraine, which has pushed up energy and food prices, and partly because of bottlenecks in supply chain that drove up US prices.

Eurostat, the European Union’s statistical service, says it expects year-on-year inflation to hit 8.6% last month from a year earlier in the 19 countries that share the euro, and up from an 8.1% annual increase in May. .

The International Monetary Fund has forecast that consumer prices in the world’s advanced economies will rise 5.7% this year, the most since 1984. The IMF projects inflation of 8.7% in emerging and developing countries the poorest, the highest rate since 2008.

HOW LONG WILL IT LAST?

No one is certain. High consumer price inflation could persist as businesses struggle to meet consumer demand for goods and services. A recovering labor market — employers created a record 6.7 million jobs last year and a healthy average of 457,000 per month so far this year — means Americans as a whole can afford to continue spending.

The Fed expects inflation to stay above its annual target of 2% through 2024. But relief from rising prices could be on the way. Oil prices fell on fears of an economic slowdown. Blocked supply chains are showing signs of improvement, at least in areas like transportation. Commodity prices have started to fall. Wage increases have slowed. And surveys show that Americans’ long-term inflation expectations have eased — a trend that often points to more subdued price increases over time.

Additionally, the Fed’s pivot to an aggressive anti-inflationary policy could eventually reduce consumer demand. Inflation itself erodes purchasing power and may force some consumers to cut spending.

At the same time, new variants of COVID could cloud the outlook – either by causing epidemics that force factories and ports to close and further disrupt supply chains, or by keeping more people at home and in reducing the demand for goods.

HOW DO HIGHER PRICES AFFECT CONSUMERS?

The strength of the labor market is pushing workers’ wages up, but not enough to offset the rise in prices. Labor Department says after adjusting for higher consumer prices, hourly earnings for private sector employees fell 3.6% last month from a year earlier, the 15th straight decline .

There are exceptions: wages after inflation have increased by more than 4% for hotel workers and 3% for those working in bars.

–The Associated Press

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