November 2021 CPI: Inflation rose at the fastest pace since 1982

Prices are rising at the fastest rate in nearly 40 years, new data showed on Friday showed, as supply chain disruptions, rapid consumer demand and rising housing costs fuel an inflationary surge.

Soaring consumer costs could cause problems for Federal Reserve and White House officials, who are trying to calibrate policy at a time when the labor market has yet to fully heal from the pandemic, but Price increases are proving to be more persistent than policymakers had done. expected.

the Consumer price index climbed 6.8% in the year through November, the data shows, the fastest pace since 1982. After cutting out food and fuel, which can move a lot from month to month other, inflation soared 4.9%. This is the fastest annual reading since 1991.

Monthly price increases – the variation between October and November, rather than over the past year – have moderated somewhat, but still have increased at an unusually rapid rate.

The question is what happens next. Fed officials have become increasingly concerned about inflation, both because the hike has lasted longer than expected and because it shows signs of broadening to areas less affected by the pandemic, increasing the risk that quick wins will take hold.

“It just keeps the pressure on Fed officials,” said Kathy Bostjancic, director of US macro investor services at Oxford Economics.

Earlier this year, price increases focused on goods. Used cars and sofas were in demand as the pandemic changed people’s lifestyles. Factories around the world have struggled to keep up with the surge in purchases, in part because virus-related shutdowns have disrupted production. Shipping routes and ports also became clogged as demand followed an atypical pattern, with too much cargo going to the United States trying to leave Asia in particular. As supply grew scarce, prices surged higher.

These disruptions were to be temporary. Instead, they’ve been going on for months as demand for products remains strong and the virus continues to disrupt manufacturing and transportation.

Inflationary pressures are also spreading to areas that are not as directly affected by the virus. Rental costs, for example, have risen sharply as soaring home prices lock potential buyers out of the market. Housing costs make up a large part of the consumer price index, which helps drive headline inflation.

Jennifer Callahan, a mother of two in the Denver area, has been renting a three-bedroom home since her previous home burned down in early 2021. But local rents are rising and she fears she won’t be able to find a comparable place. for something like the $ 2,400 she and her roommate pay if their lease isn’t renewed.

“Houses in this area are selling for crazy and crazy sums,” she said. “This completely messes up the rental market. “

As costs rise for a wider range of goods and services, the Fed is increasingly concerned.

“In general, the higher prices that we are seeing are related to the imbalances between supply and demand that can be attributed directly to the pandemic and the reopening of the economy, but it is also true that the price increases are occurring. have spread much more widely in recent months, ”Fed Chairman Jerome H. Powell said in testimony to Congress late last month. “I think the risk of higher inflation has increased.”

Fed officials are positioning themselves to use their policy tools to weigh on inflation, if necessary.

Mr Powell signaled last week that the Fed, which presented a plan last month to begin cutting back on support for the economy, is ready to discuss speeding up that process at its two-day policy meeting. next week. Economists expect the Fed to announce a plan to slow its monthly bond purchases quickly enough for the program to end sooner than originally expected.

That would mean the Fed is adding less juice to the economy with each passing month. It would also allow policymakers to raise interest rates faster, their most powerful tool. Policymakers have made it clear that they would rather finish buying bonds before increasing borrowing costs, which are close to zero, so that their policy tools do not work against each other.

Friday’s data will keep policymakers on track to accelerate their plans to cut bond purchases, said Alan Detmeister, senior economist at UBS and former head of the wages and prices division at the Fed Board in Washington.

“It’s still a huge number – very, very strong,” Mr Detmeister said, explaining that while he expects inflation to moderate, it may be necessary to wait until the middle of the year. next year so that it will manifest itself clearly during the year. year data.

“It seems pretty clear that they are going to speed up the taper,” he added.

Taking the next step – raising rates – would make debt of all kinds, from mortgages to auto and business loans, more expensive. This would likely slow spending and hiring, dampening demand and weighing on high housing costs. The combination could help curb price gains.

But it could also leave the country with a less competitive labor market. It could be serious if the millions of people who remain out of the workforce compared to before the pandemic decide to embark on a job search. Many workers have yet to return due to childcare issues and other factors related to the virus.

Even so, the Fed is wary of letting inflation soar. In the 1960s, the central bank did not take decisive enough action to curb the rise in prices. Inflation skyrocketed, reaching double-digit levels during the 1970s, and then Fed Chairman Paul Volcker sharply hiked interest rates to get things under control in the early 1980s.

The blow to demand triggered a painful recession before bringing price gains to a halt. The mistake, and its consequences, has haunted central bankers ever since.

This time around, Fed officials are monitoring wages and consumer expectations to try to determine if prices are about to become more of a problem.

As housing and other daily costs increase, workers may start asking for increases to help offset the financial blow. Rising wages can fuel inflation as businesses pass rising labor costs on to consumers and higher wages help households keep spending, thus supporting consumer demand.

Data shows that wages are already rising rapidly. Employers are competing for workers at a time when vacancies far outweigh the number of people actively seeking work, and they are raising wages to attract and retain workers. The cost of employment index, a measure the Fed is monitoring closely, picked up in particular during the three month period that ended in September.

Wages are increasing particularly fast for low wages, although they haven’t kept up with the acceleration in prices for most workers in recent months. Still, maintaining government benefits – including an expanded child tax credit – may mean families are better placed to cope with growing expenses.

Because consumers have been able to afford to spend, businesses have been able to charge more, protecting and even increasing their bottom line as input costs rise. Profit margins as a large number of companies have expanded this year, including in some of the sectors hardest hit by supply problems.

“We are actually finding that the price increases that we have experienced due to the cost coverage we get from inputs and freight are being absorbed by the customer,” Bruce K. Thorn, CEO of Big Much, said during ‘a call for results on December 3, later adding that “we don’t see this resistance”.

Democrats began to blow up big companies to enjoy the moment.

“Now, as working families are just starting to get back on their feet, mega-businesses are more likely to pass higher costs on to consumers rather than cut profits,” said Senator Sherrod Brown, Democrat of the Ohio, at a recent hearing.

But the Republicans have put the blame on Mr Biden and the Democrats, a development that threatens to jeopardize the president’s broader agenda, including the $ 2.2 trillion climate and social policy bill he is trying to push through according to party lines. Centrist Democrats have started to question the wisdom of pouring more money into the economy at a time when demand and prices are hot.

“The unknown we face today is far greater than the need for people to believe in this ambitious bill that we are considering, and we need to make sure we get it right,” Senator Joe Manchin III, Democrat from West Virginia, said earlier this week. Mr Biden will need the support of all Senate Democrats to pass the legislation, which makes Mr Manchin’s vote critical.

Inflation is also a political responsibility for the White House among voters, as it makes everyday life more difficult for many Americans, especially those who depend on savings held in low-risk investments like bank accounts. savings or certificates of deposit. These people are seeing the value of their assets decrease.

Retirees living on Social Security will see their benefits increase – cost of living adjustment for 70 million Americans will be 5.9% in 2022 – but they are already bearing the brunt of the rise in consumer prices.

Diana Madoshi, a retired nurse from Placer County, Calif. Who relies on Social Security benefits, said rising prices at the grocery store had started to strain her budget. A carton of eggs, which cost around $ 2.80 before the pandemic, now costs almost $ 4, she said.

She took fewer Uber trips to the doctor and cut back on clothing purchases to offset the costs.

“This is just another harsh reality of what we are going through right now,” said Ms. Madoshi, 75. “And there’s nothing I can do about it.”

– Madeleine Ngo contributed reporting.