The sustained growth in inflation did not continue only in June. It intensified. For the 12 months ending June, the government’s consumer price index rose 9.1%, the sharpest year-on-year jump since 1981. And it was nothing ahead of energy prices: fueled by huge demand and Russia’s invasion of Ukraine, energy costs have increased by about 42% in the past 12 months, the biggest such jump since 1980. Is.
Even if you toss out the prices of food and energy – which are notoriously volatile and have risen in price a lot – so-called core inflation rose 5.9% over the past year.
Consumers have endured pain in everyday routine. Unleaded gasoline is up 61% in the past year. Men’s suits, jackets and coats, 25%, airline tickets, 34%. Eggs 33%. Breakfast Sausage, 14%.
Under Chair Jerome Powell, the Federal Reserve never expected inflation to be so severe or persistent. Yet after a mere thought for decades, high inflation reestablished itself with brutal speed as labor and supply shortages countered the rapid growth in demand for goods and services in the economy.
In February 2021, the consumer price index was trading up just 1.7% from its level a year ago. From there, it accelerated — past 2% in March, past 4% in April, and 5% in May. As of December, consumer prices hit a 7% year-over-year barrier. And it went on: 7.5% in January, 7.9% in February. And the growth has been above 8% every month since March.
The United States has endured worse inflation before, but not in several decades. The post-World War II inflation peak reached around 20% in 1947, as a result of wartime price curbs, supply constraints and reduced consumer demand. Inflation in the 1970s and early 1980s peaked at 14.8% in March 1980, before the Fed ended higher prices with aggressive rate hikes, leading to brutal back-to-back recessions in 1980 and 1981–1982. Cause.
For months, Powell and some others portrayed high inflation as only a “transient” event, while the economy rebounded sharply from the pandemic recession no one had anticipated. not anymore. Now, most economists expect inflation to pick up well after this year, with demand exceeding supply in many sectors of the economy.
So the Fed has fundamentally changed course by implementing a succession of large rate hikes. The central bank is making a high-risk bet that it can slow the economy enough to trigger a recession without weakening it enough to contain inflation.
With a strong job market and extremely low unemployment, the overall economy looks healthy for now. But many economists have warned that the Fed’s steady credit tightening will likely lead to a recession.
What is causing the spike in inflation?
Good news – mostly. When the pandemic crippled the economy in the spring of 2020 and began lockdowns, businesses closed or hours cut and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output fell at a record 31% annual rate in the April-June quarter of 2020.
Everyone was ready for more suffering. Companies cut investments and suspended stockings. A severe recession ensued.
But instead of sinking into a prolonged recession, the economy staged an unexpectedly encouraging recovery, fueled by a huge influx of government aid and emergency intervention by the Fed, which among other things slashed rates. By the spring of last year, the rollout of vaccines had encouraged consumers to return to restaurants, bars, shops, airports and entertainment venues.
Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings or buy enough supplies to fulfill customer orders. As business returned, the port and freight yard could no longer handle the traffic. Global supply chain seized.
Costs rose as demand increased and supply fell. And companies found they could pass those high costs on to consumers in the form of higher prices, many of whom managed to rack up savings during the pandemic.
Critics have criticized, in part, President Joe Biden’s $1.9 trillion . blamed coronavirus The relief package, along with $1,400 checks to most households, to warm an economy that was already burning on its own. Many others attributed a major blame to the lack of supplies. And some argued that the Fed kept rates near zero for too long, lending fuel to runaway spending and raising prices in stocks, homes and other assets.
Is High Inflation Only Affecting the United States?
Not by a long shot. Prices have been rising almost everywhere in the world, in part as a result of Russia’s invasion of Ukraine, which has raised energy and food prices, and in part due to supply chain constraints that have driven US prices up.
Eurostat, the EU statistical service, says it expects year-on-year inflation in the 19 countries sharing the euro currency to reach 8.6% last month, compared with a year ago, and 8.1% in May. above annual growth.
The International Monetary Fund has forecast that consumer prices in the world’s advanced economies will rise by 5.7% this year, the highest since 1984. The IMF has predicted 8.7% inflation in poor emerging market and developing countries, the highest rate since 2008.
How long will it last?
No one knows for sure. As long as companies struggle to meet consumer demand for goods and services, high consumer price inflation can endure. A recovering job market – employers added a record 6.7 million jobs last year and a healthy average of 457,000 a month so far this year – means Americans as a whole can afford to spend.
The Fed expects inflation to remain above its 2% annual target in 2024. But relief may come from higher prices. Oil prices are falling due to fears of an economic slowdown. The jammed-up supply chain is showing at least some signs of improvement in industries like transportation. Commodity prices have started falling. Wage growth has slowed. And polls show that over the long term, Americans’ expectations for inflation have plummeted — a trend that often points to more moderate price increases over time.
What’s more, the Fed’s pivot toward an aggressively anti-inflation policy could ultimately dampen consumer demand. Inflation itself is reducing purchasing power and may force some consumers to reduce spending.
At the same time, the new COVID variants could bleak the outlook – either causing outbreaks that force factories and ports to close and disrupt supply chains or keep more people home and goods. reduce demand.
How are high prices affecting consumers?
The strong job market is pushing up workers’ wages, though not enough to offset higher prices. Hourly earnings for private sector workers fell 3.6% last month compared to a year ago, the 15th consecutive decline, the Labor Department says, taking into account higher consumer prices.
Exceptions are: Post-inflation wages rose by more than 4% for hotel workers and 3% for bar workers.
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