Here's why inflation worries Washington

Aquan Brunson, 45, from Brooklyn, bought three slices of cheese pizza every day from 99 Cents Pizza of Utica for lunch. But about three...


Aquan Brunson, 45, from Brooklyn, bought three slices of cheese pizza every day from 99 Cents Pizza of Utica for lunch. But about three months ago, inflation devoured that third tranche. The store stuck on its old sign to alert customers that it is now “$ 1.50 Hot Pizza”.

“The dollar is not taking us far,” Mr Brunson said, patting his fatty lunch with paper napkins on a gray December afternoon. “The cost of everything is increasing. “

Consumers across the country can tell you that inflation has been high this year, as evidenced by more expensive used cars, more expensive furniture, and the continued demise of the famous New York dollar slice. But until recently, policymakers in Washington responded with a common refrain: The rapid price increases were likely transient.

Last week, policymakers said it was it’s time to retire the label “transitional” and recognized that the price increases were be more persistent provided that.

Jerome H. Powell, Chairman of the Fed, said that while his basic expectation is for price gains to slow down, there is a growing threat that they won’t do it soon enough or enough.

“I think the risk of higher inflation has increased,” he said.

A new report due for release on Friday is expected to reinforce that concern. The consumer price index could show that inflation rose 6.8% over the past year, the fastest pace in almost 40 years. More worrying for the Fed is that inflation is spreading to many products and services, not just those directly affected by the supply chain issues that have driven up car and fuel prices. electronic.

Here’s a look at what you need to know about the surge in prices sweeping America and the world – and what to expect when new US consumer price inflation figures are released on Friday. .

When economists and policymakers talk about “inflation,” they usually mean the increase in the prices of the things people buy out of pocket – followed by the Consumer Price Index, or CPI – or the change in cost. things people consume either out of pocket or through government payments and insurance, which are tracked by the less discounted personal consumption expenditure index.

Both measures are up this year, and CPI data that will be released on Friday should show inflation rose the most since 1982. At the time, Paul Volcker was the chairman of the Fed and leading a war against years of price gains by raise interest rates double digits to cripple business and consumer demand and slow the economy. Today, interest rates are set at near zero after policymakers cut borrowing costs at the start of the pandemic.

There are a lot of differences between 1982 and today. Inflation was low for years until 2021, and pandemic-era lockdowns and subsequent reopening are behind much of the current price hike.

Consumer demand surged as phased factory closures and a reshuffle in spending on services goods caused manufacturing delays and overwhelmed ports. This is why policymakers were comfortable ruling out high inflation for some time: it was caused by problems that seemed likely to work themselves out.

But the price gains are coming more and more from sectors with a less clear and obviously temporary pandemic decline. Rents, which constitute a large part of inflation, are increasing at a sustained rate.

“Housing – this is the key enlargement,” said Laura Rosner, economist at MacroPolicy Perspectives.

The potential for broader and more lasting price pressures has put Fed officials on edge. Central bank policymakers, who had slowly moved away from supporting the economy, made it clear last week that they were preparing to accelerate the pullback.

“They know this report is coming,” Ms Rosner said of the number expected on Friday. “This will confirm and explain why we have seen such a drastic change. “

The disruptions to global commodity flows are not fading as quickly as policymakers had hoped. Waves of additional viruses have kept factories from operating at full capacity in Asia and elsewhere. Shipping routes are obstructed and consumers are still buying goods at a rapid pace, adding to the backlog and making it difficult to normalize the situation.

Households have a few $ 2.5 trillion in excess savings, thanks in part to the pandemic-era stimulus measures, which could help them keep buying home gym equipment and new coffee tables until next year.

“The earliest we see things normalizing is really the end of 2022,” said Phil Levy, chief economist at logistics company FlexPort. Regarding the misunderstanding about inflation, he said, “Part of the problem is that we have treated the supply chain as if it were a special category, like food or energy “.

But as 2021 has clearly shown, the world economy is a delicately balanced system. Take the auto industry: Virus-induced semiconductor plant closures in Taiwan have delayed production of new cars. With the shortage of new cars, car rental companies have had to compete with consumers for used vehicles, leaving shortages on used car lots. The chain reaction has driven up prices every step of the way.

Global growls have also helped push up food prices, as can be seen from Abdul Batin, owner of 99 Cents Pizza of Utica. He plans to rename it “Utica’s $ 1.50 Pizza” and explains that while some customers have been hesitant about the cost increase, he couldn’t help it.

“Everything is going up right now – the cheese, the flour, even the price of soda,” he said.

Another thing that could keep inflation high? Wages climb quickly, and some companies have started talking about passing these increasing expenses on to customers, who seem willing and able to pay more. 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.

The risk is that this is an early, and still weak, echo of the kind of wage and price dynamics that helped fuel price hikes in the 1970s and 1980s. unions were a much more powerful force and they helped keep wages up with rising prices. Inflation and wage gains spiraled each other upward, to the point that price hikes got out of hand and demanded a response from the Fed.

In the years that followed, workers generally had less formal bargaining power. But employers are grappling with labor shortages as the virus keeps many potential employees on the sidelines and demand increases. This gives workers the opportunity to earn higher wages as they face rising costs themselves, and it prompts many employers to raise wages to compete for scarce talent. This could keep demand strong by strengthening people’s means of spending.

“Looking ahead, companies in all major industries expect widespread wage increases to continue,” the New York Fed said in its section of the Fed’s Beige Book, An Anecdotal Business and Social Contact Investigation. by the regional banks of the Fed.

In the Atlanta area, notes the Beige Book, “several contacts mentioned that labor costs were already passed on to consumers with little resistance, while others said plans were underway. to do it”.

Mr. Brunson – the pizza aficionado – works in a grocery store. They have increased his salary, he said, but it is not enough to meet the rising cost of food and other expenses.

“They gave us an extra dollar, but that’s just to offset inflation,” he said. He and his family, three grown children who live with him, are coping with less expenses. “No restaurant meals, less food, less meat.”

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