Too Little for Too Much: America’s Rising Inflation

After years of historically low inflation, consumer prices in the U.S. went on a steep ascent in the past year. From December 2020 to December 2021, the Consumer Price Index, the most widely followed inflation gauge, increased by 7.0 percent—its highest rate in nearly 40 years. According to the Labor Department, the fourth-quarter gain, compared with a year ago, was 4.0 percent on a non-seasonally adjusted basis. 

Economists caution that there are numerous factors contributing to the high inflation, especially an overwhelmed supply chain. According to researchers at the Federal Reserve, prices for moving goods by ocean from China to the U.S. West Coast rose more than 72 percentage points from an early-pandemic low to a peak in 2021’s third quarter—more than 50 percent above the long-term trend for container shipping rates. Labor shortages, increasing demands, and supply constraints caused by COVID-induced lockdowns have also contributed to the inflation spike. The latest wrinkle—the high level of individuals testing positive and staying away from work due to the omicron variant—have further worsened the supply chain disruptions. 

Amid the supply and demand imbalances for both goods and labor, average hourly wages rose 4.7 percent in December 2021 from the previous year, and the U.S. employment-cost index—a quarterly measure of wages and benefits paid by employers—showed that costs are continuing to rise at the highest rate in two decades in the past year. Rising pay and benefits are putting more money in workers’ pockets, but not enough to keep pace with rising prices. In the past year, pushed up by increased wages, grocery prices increased by 6.5 percent, housing prices by 3.8 percent, natural gas by 24.1 percent, propane, kerosene and firewood by 33.8 percent, fuel oil by 41 percent, and gasoline by a whopping 50.8 percent. In turn, price gains feed back into wage gains, completing a vicious cycle.

It is unclear when and how the inflation will subside with the current surge in labor wage and costs. Economists predict that inflationary pressures are likely to last at least well into the middle of 2022. “With both wage and underlying price inflation spiraling out of control, the Fed is a lot less confident that this surge will be short-lived,” said Paul Ashworth, chief U.S. economist at Capital Economics. Additionally, as the Omicron variant continues to sweep the country, the future path of the pandemic remains uncertain. Any future escalation would only aggravate the current scarcity in workers and further disrupt the supply chain. 

Still, there is a sign that inflation could be easing as labor cost increase slows down, with the Labor Department reporting a seasonally adjusted one percent rise in compensation for the fourth quarter, down from a 1.2 percent increase the previous three months. The International Monetary Fund expects U.S. core inflation to peak in the first quarter, easing to 3.4 percent by the end of 2022 and dropping to the Federal Reserve’s average target of 2 percent in 2023. According to McDonald’s Corp. Chief Financial Officer Kevin Ozan, “most of [the inflationary] pressure will be in the first half of [2022], and as the year progresses, we expect that to ease.”

So far, investors and Federal Reserve policy makers consider the labor market to be at or near full employment, despite the fact that the economy has only recovered about 84 percent of the jobs it had before the pandemic. The Fed is shifting gears from stimulating the economy to fighting inflation while trying to maintain the labor-market recovery, as Chairman Jerome Powell signaled that it would begin steadily raising interest rates in March. Some predict that increased interests will hopefully dampen demand and ease the supply, providing for a steady settling of inflation. But Apple’s Chief Executive Tim Cook said, “the world has changed, and we’ll see.” With the unprecedented economic uncertainty caused by the pandemic, this coming year will hold much volatility.

By: Arielsie Li

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