Inflation near 40-year high shocks Americans, raises concerns in Washington – News Couple
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Inflation near 40-year high shocks Americans, raises concerns in Washington


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The United States is preparing to enter the third year of the pandemic with a booming economy and a virus still mutating. But for Washington Wall Street, the aftershock of the Covid virus is beginning to outpace almost everything else.

Already steep inflation is expected to rise further when November data is released on Friday, to 6.8%. That would be the highest rate since Ronald Reagan was president in the early 1980s — and in the lives of most Americans.

The higher prices helped deliver a banner year for American business, which has been posting its biggest profit margins since the 1950s. But for the administration of Joe Biden and Jerome Powell’s Federal Reserve – who were not expecting it – the sudden return of inflation, which had largely lain dormant for decades before 2021, looks increasingly painful.

Likely to lead to some big changes next year, as the Fed heads toward raising interest rates and the president heads into the midterm elections with approval ratings waning.

How did this happen? Essentially, the pandemic has made it difficult for the world to produce and transport things. The government pushed into the crisis like never before, so families stayed keen to spend. And the combination of lockdowns and Covid alerts meant their purchasing power was focused on consumer goods rather than services.

That’s why there are long lines of cargo ships stretching off the coast of Los Angeles waiting to dock, while used-car dealers continue to raise prices, and a rise in global goods is making Americans pay more for groceries and gas pumps.

Read more: Correcting inflation is a moment of success or failure on Wall Street

Contact points everywhere

A year ago, economists were forecasting 2% inflation for 2021. The pandemic brought prices down early, and everyone expected a recovery. But Fed Chair Powell’s prediction that it would be temporary, and not very significant, was widely shared.

Amir Sharif, president of research firm Inflation Insights LLC, said the first hint that inflation was really on the cusp of acceleration came in February. “Something was exploding under the surface – more specifically in the cars.”

The pandemic-induced shortage of semiconductors was hampering production of new cars, so buyers — including rental companies, who sold their fleets earlier in the crisis — were raising prices for older cars.

Americans had money. Unlike the recent recession, when fiscal austerity hampered the recovery, Congress has kept the stimulus flowing. On top of the $2.2 trillion rescue package in the spring of 2020, when the pandemic arrived, another $900 billion came in December 2020, then another $1.9 trillion in March after Biden took office.

But consumers have remained reluctant to spend money at gyms or restaurants, for example, where they may catch Covid-19 – so they buy more goods instead. Shortages of materials and workers have caused bottlenecks along the supply chain. Ports were jammed. Imports kept breaking records.

“It was a demand shock,” says Anita Markowska, chief financial economist at Jefferies. “It is essentially the American consumer that has caused this inflationary impulse, just by buying more things than the global economy can produce.”

Commodity Stories

With other countries also recovering, albeit to a lesser degree, globalized commodities such as oil have been rebounding. Pump prices in the US are about 50% higher than they were a year ago.

The rise of commodities was not limited to energy. One of the events that grabbed the headlines of the inflation pandemic came in the timber markets, where prices jumped nearly 70% from early March to early May — adding to the impending housing boom.

When the wood bubble burst, it was cited by some — including Powell — as an example of how pandemic inflation could soon fade. But global food prices, after a lull in June and July, are starting to rise again. Helped by some bad weather around the planet, it’s up 27% in the 12 months through November, reflecting jumps in everything from meat and wheat to coffee and cooking oil.

“We saw higher product cost inflation in most categories” in the third quarter, said Gary Millership, chief financial officer of the grocery chain at Kroger, in an earnings call on Dec. “We pass on a higher cost to the customer where it makes sense to do so.”

For American businesses, those higher costs included wage bills. Employers have been struggling to increase the number of employees fast enough to meet the growing demand. In June, Chipotle Mexican Grill Inc. headlines by raising prices by about 4% to offset wage increases. More companies will join them as the year goes on.

At least in the eyes of the market, the September CPI report was the turning point, when inflation spread beyond a few hot spots. The overall rise in the index was muted — but food and shelter contributed more than half of it, with rents jumping the most in two decades.

Biden feels the heat

Biden’s plan was to pursue the Covid stimulus with billions of dollars in investments in childcare and clean energy. Despite this, centrist Democrats in Congress were already pointing to government spending as a driver of rising inflation — and refusing to vote on more of it. Programs have been scaled back. More cuts may follow in the Senate this month.

The president’s approval ratings have been on the decline, with polls indicating that voters dislike his handling of the economy and tend to blame him for inflation. That spells trouble for his party, which must defend a slim majority in next November’s midterm elections.

Biden set up a supply chain task force to ease congestion, released oil reserves, and called on gasoline companies to reap a lot of profits. He’s under pressure to do more — but bosses have limited powers to counter soaring prices.

Powell’s Caves

Throughout 2021, the White House, when pressed for inflation, referred it to the Federal Reserve — citing experts there who said it would be temporary. But in recent months, as prices have risen, Federal Reserve officials have encountered growing resistance to this position, and have begun to back away from it.

On November 30, just over a week after Biden picked a second term, Powell finally relented. “I think the word ‘transition’ has different meanings for different people,” he said. “Maybe this is a good time to retire from that word.”

A few minutes later, he released important news: Fed officials, at their next policy meeting on December 14-15, will consider accelerating the withdrawal of monetary stimulus — potentially ending their bond purchases as early as March, opening the door to an interest rate hike by middle of next year.

The Powell pivot came as a surprise, with market volatility rising after the arrival of the Omicron variable. Federal Reserve officials tend to downplay the idea that any one month’s data – which is all they have since the gradual plans were put in place in early November – is enough to force a change in monetary policy.

kitchen tables

At this point, the major debate over inflation had erupted from political circles. They are now made around kitchen tables, too.

Economists tend to look at so-called “core inflation,” which rules out more volatile food and energy prices. For American workers, paying a dollar more per gallon at the gas pump, or 20% more for beef, is a more tangible measure.

In November, one in four respondents to a University of Michigan survey said that inflation has lowered their living standards, double the level they were six months ago. The unusual jump in the cost of living sheds light on income, and whether it’s keeping up.

With desperate bosses wanting to fill an unprecedented number of vacancies, workers have a rare bargaining power. About 10,000 Deere & Co workers strike for the first time since 1986, winning a 10% increase plus better retirement benefits.

Across the economy, compensation rose at the fastest pace ever in the third quarter. Those at the bottom of the wage ladder benefited the most – even though there are often wage increases below the current rate of inflation.

Read more: Every step in the global supply chain goes wrong – all at once

What then?

While Bloomberg Economics is forecasting inflation around 7% for a few more months, there is widespread agreement that it will drop sometime next year.

Energy markets are already showing some relief, with oil down about 15% since late October, heralding lower fuel and transportation costs in 2022. Durable goods inflation is expected to slow as the pandemic subsides and households return to more normal spending patterns.

Compensation for this may be housing costs. It could rise at a rate of 6% to 7% by next summer, David Wilcox of Bloomberg Economics says, about double the rate in the years leading up to the pandemic.

Perhaps the biggest unknown in 2022 will be wages, which have already risen faster than at any time in the decade-long expansion that ended with the arrival of Covid-19.

“The question for me is not whether inflation will slow,” said Jeffreys’ Markowska. “The question is, are we going back to 2? Are we going back to 3? What is the mid-term destination? And that, I think, will be determined by the labor market.”

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