By CHRISTOPHER RUGABER AP Business Editor
WASHINGTON (AP) — Inflation jumped to its fastest pace in nearly 40 years last month, a 7% spike from a year earlier that is boosting household spending, eating away at wage gains and exerting pressure on President Joe Biden and the Federal Reserve to deal with this has become the biggest threat to the US economy.
Prices have risen sharply in 2021 for cars, gasoline, food and furniture as part of a rapid recovery from the pandemic recession. Vast injections of government aid and ultra-low interest rates have helped spur demand for goods, while vaccinations have given people the confidence to dine out and travel.
As Americans increased spending, supply chains remained squeezed by shortages of workers and raw materials, which amplified price pressures.
The Labor Department reported Wednesday that a measure of inflation that excludes volatile food and gasoline prices jumped 5.5% in December, also the highest in decades. Headline inflation rose 0.5% from November, compared to 0.8% the previous month.
Price gains could slow further as problems in supply chains ease, but most economists say inflation won’t return to pre-pandemic levels anytime soon.
“Inflationary pressures in the United States show no signs of easing,” said James Knightley, chief international economist at financial services firm ING. “It hasn’t been this high since the days of Thatcher and Reagan. We could be close to the peak, but the risk is that inflation stays higher for longer.
High inflation isn’t just a problem for the US In the 19 European countries that use the euro, inflation rose 5% in December from a year earlier, the biggest increase ever recorded.
Businesses large and small are adapting as best they can.
Nicole Pomije, owner of a Minneapolis-area bakery, said she plans to raise cookie prices due to soaring ingredient costs.
Its basic cookies were priced at 99 cents each, while premium versions sold for $1.50 each. But Pomije said it will have to raise the prices of its basic cookies to the premium price.
“We have to make money,” she said. “We don’t want to lose our customers. But I think we could.
Companies struggling to hire have increased their wages, but rising prices for goods and services have eroded those income gains for many Americans. Low-income families have felt it the most, and polls show inflation has started to replace even the coronavirus as a public concern.
The United States hasn’t seen anything like it since the early 1980s. Back then, Fed Chairman Paul Volcker responded by pushing interest rates to painful levels – the prime rate for the banks‘ best customers reached 20% in 1980 – and plunged the economy into a deep recession. But Volcker was able to rein in inflation that had hit double-digit year-on-year levels for much of 1979–81.
High inflation has put President Biden on the defensive. His administration, echoing Fed officials, initially suggested the price hikes would be temporary. Now that inflation has persisted, Biden and some congressional Democrats have started blaming big business. They say meat producers and other industries are taking advantage of pandemic-induced shortages to drive up prices and profits. But even some centre-left economists disagree with this diagnosis.
On Wednesday, the president released a statement saying December’s decline in gas prices and a smaller increase in food prices showed progress.
One of the trends that experts fear is a wage-price spiral. This happens when workers seek higher pay to offset higher costs, and then companies further increase costs to cover that higher pay. On Tuesday, Federal Reserve Chairman Jerome Powell told a Senate panel that he had yet to see evidence that wages were driving up prices broadly across the economy.
According to economists, the main driver of inflation is the mismatch between supply and demand. Used car prices have soared more than 37% in the past year as a shortage of semiconductors has prevented automakers from making enough new cars. Supply chain constraints have driven furniture prices up almost 14% over the past year.
Shoppers feel the pinch all around them, from the gas station to the grocery store.
Vicki Bernardo Hill, 65, an occupational therapist in Gaithersburg, Maryland, says she no longer throws extra canned food, cereal boxes or baked goods into her cart at the Giant Food store.
“I try to stick to my list and buy things that are on sale,” Hill said.
Because she couldn’t find a good deal on a used car, Hill recently bought a new Mazda, spending $5,000 more than expected.
Inflation could ease as the omicron wave subsides and Americans shift spending more towards services such as travel, dining and going to the movies. This would reduce demand for goods and help clarify supply chains.
But some higher prices, such as rents, could prove more rigid. Rental costs, which have accelerated since the summer, rose 0.4% in December, the third consecutive monthly increase. This is important because housing costs represent one-third of the government’s consumer price index.
Powell told Congress that if it becomes necessary to fight high inflation more aggressively, the Federal Reserve stands ready to accelerate the interest rate hikes it plans to begin this year. The Fed’s short-term benchmark rate, now close to zero, is expected to be raised at least three times this year.
Rate hikes would make borrowing for a house or a car more expensive, and therefore help calm the economy.
Some economists and members of Congress worry that the Fed moved too slowly to stave off inflation and that this could eventually force even bigger rate hikes that could hurt the economy.
Republicans in Congress and even some liberal economists say Biden deserves at least some blame for high inflation, arguing that the financial bailout package he pushed through Congress last March has given a massive boost to an already struggling economy. to get stronger.