Inflation in the U.S. reached its fastest pace in nearly four decades last year when an imbalance between supply and demand, along with aid measures designed to support the economy, caused prices to rise at an annual rate of almost 7%.
The Ministry of Employment said on Wednesday that the consumer price index – which measures what consumers pay for goods and services – rose by 7% in December compared to the same month a year earlier, an increase of 6.8% from November. It was the fastest pace since 1982 and the third consecutive month in which inflation was higher than 6%.
The so-called core price index, which excludes the sometimes volatile categories of food and energy, climbed 5.5% in December from a year earlier. This was a larger increase than the 4.9% increase in November, and the largest increase since 1991.
On a monthly basis, the consumer price index rose at a seasonal level of 0.5% in December compared to the previous month, and a slowdown compared to October and November.
“There’s still tremendous momentum when it comes to inflation right now. While inflation is expected to peak in the next few months, the pace overall is going to remain challenging for consumers, companies and policies,” said Sarah House, senior director and economist at Wells Fargo.
The last time the price index rose at such an annual rate was in June 1982, but the circumstances were very different from today. While inflation is now rising, it then fell after reaching a peak of 14.8% in 1980, when Jimmy Carter was president and the revolution in Iran caused oil prices to rise.
At the time, the new chairman of the Federal Reserve, Paul Walker, wanted to smash inflation by dramatically raising interest rates, causing a brief recession in the 1980s. When interest rates reached 19% in 1981, a much deeper recession began. By the summer of 1982, both inflation and interest rates had fallen sharply.
Disruptions in supply chains and shortages of goods and materials
Today, the corona plague has caused supply chain disruptions and shortages of goods and materials – especially cars – along with high demand from consumers who have a lot of money from government assistance, and these are the factors driving the rise in inflation.
Prices of cars, furniture and other durable goods continued to drive much of the rise in inflation, with their fuel being an epidemic-related imbalance between supply and demand, which most economists expect to fade as the corona’s impact on economic activity fades. Used car and truck prices jumped 37.3% in December from a year earlier, while living room, kitchen and dining room furniture prices jumped 17.3%.
Economists and the Federal Reserve expect inflation to fall this year as the supply and demand chains’ bottlenecks return to normal levels, but the corona’s omicron strain has renewed uncertainty about the economic outlook as long as the plague continues.
Constance Hunter, chief economist at KPMG, predicts that growing demand for commodities will reverse in the first half of 2022, easing overall price pressures. “I think we’ll go back to some semblance of normalcy when people spend their savings and hopefully after we get past the omicron,” she said.
Federal Reserve Chairman Jerome Powell said in a congressional hearing on Tuesday that he was optimistic that supply chain problems would be eased this year and help lower inflation. However, he also noted that the smaller labor force in the U.S. “could become a problem later on in terms of inflation, probably in a larger media than the issue of supply chains,” Powell said.
Inflation figures from December hint at a mixed impact of the Omicron strain, which now poses a new threat to the economy as the plague enters its third year. Flight ticket prices and especially hotels rose in December, although prices for leisure activities fell. The prices of personal services have mostly fallen during previous increases in infections in Corona.
The rise in energy prices – driven by epidemic-related disasters as well as weather and geopolitical factors – showed signs that it was beginning to end, and in December and November fuel prices fell by half a percent. However, inflation in food prices remained high, rising by 0.5% in December compared with November, a slightly slower pace than a month earlier.
The December employment report further tightened the job market, and the unemployment rate fell to 3.9% from 4.2% in November, the Ministry of Employment said. This gave workers greater leverage over their wages.
While wages rose faster last year than before the epidemic, they did not rise enough to keep pace with inflation, and the average hourly wage rose 4.7% in December from a year earlier.
“We are seeing people reorganize into jobs that are more suitable or preferred to them. So the wage increases we are seeing are concentrated in the bottom 20%,” Hunter said.
Wage increases are increasingly contributing to high inflation because they support greater spending but also because they increase spending on companies.
In December, about 49 percent of small businesses said they planned to raise prices over the next three months, according to data from the National Federation of Independent Businesses, an organization representing many businesses.
The particularly rapid spread of the omicron exacerbated the shortage of workers because it increased the amount of absences from work. Manufacturing companies are adopting expensive solutions in order to keep the factories working so that they can meet the high demand. FedEx said this week that the omicron is causing a shortage of manpower and delaying shipments.
John Merritt, vice president of Elaine Bell Catering from Napa, California, said manpower was an urgent issue when demand for weddings and other major events rose back last June. The company raised salaries by 50% in an attempt to retain workers and hire new ones, but still had to rely on the services of manpower agencies. Because of higher employment costs – alongside soaring prices for meat, cheese and wheat products – the company did not make profits last year, he said.
“People often say catering and restaurant workers are cheap workers. Well, our base salary currently stands at $ 30 an hour for waiters and we are still unable to fill jobs,” he said. “This is going to be an ongoing problem. If we want to have good employees for the types of events we do, we know we have to pay for it or we will not have them.”
The catering company has raised prices for the coming year by 25% to 35% compared to the levels before the epidemic. Meanwhile, customers are absorbing these price increases. “We’ve never raised prices so large from one year to the next. But we’ve never had such price increases either,” Merritt said.
Demand for furniture and other products soared during the plague, hitting supply chains and driving much of the rise in inflation. The most notable example is a shortage of processors that hurt car production, causing car and truck prices to skyrocket.
Despite the disruption caused by the Omicron strain, there are indications for improving the condition of the supply chains. A December survey of manufacturers conducted by the Inventory Management Institute showed a decrease in prices and delivery times and indicated that the shortage of materials may be alleviated to some extent.
Omair Sharif, founder of Inflation Insights, said he expects the prices of used cars and household products to fall in the coming months as consumers return to spending money on services and the amount of money saved during the epidemic will shrink.
Economists also predict that the pressure on prices from shortages of supply will be replaced by high rents and costs of medical treatments, which tend to be more stubborn. Rents, which make up almost a third of the consumer price dimension, have begun to rise in recent months.
High inflation has caused some consumers to curb their spending.
Until recently, Pete and Sally McAllister would eat a stick every Wednesday night, but have recently moved to fly because of the expensive price of beef.
“The price we pay for a filet mignon has gone up from about $ 24 per pound to more than 50. As a result, we’ve taken those meats off our diet,” said McLeister, a 72-year-old retiree from Hilton Head, South Carolina. “Chicken and beans were a good substitute to visit in terms of the proteins we eat.”
He said he also stopped raising the home heating thermostat because the price for heating is rising, and he is also making efforts to find cheaper fuel. McLeister said he plays less golf after some members canceled their subscription to the golf club to save money. “So inflation also has a certain mental price,” he said.