Why is inflation increasing now? – Councilor Forbes

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Inflation is there. The most recent Consumer Price Index (CPI) inflation report showed prices rose across the board in October. By many.

Overall, prices climbed 6.2% year over year, the largest increase since November 1990, and increased 0.9% over the past month. The higher prices were “widespread,” according to the Bureau of Labor Statistics (BLS), with substantial increases seen in the indexes for energy, housing, food, and new and used vehicles. The gasoline index alone rose 6.1% in October. Of course, these are essential to the basic financial life of normal Americans, thus stretching their bottom line even slimmer.

If we exclude volatile food and energy prices – known as core CPI inflation – the picture was a bit brighter. Prices rose only 0.6% in October, more than in September, and 4.6% over the past 12 months, for the biggest gain since August 1991. That’s fine in above the Federal Reserve’s 2% target, although the Fed prefers a different gauge inflation, PCE inflation.

There are certain elements that have contributed powerfully to these historic gains, as any driver can attest. New vehicles jumped 1.4% over the past month and are now 9.8% higher from the previous 12 months. Grocery store prices were 1% more expensive in October than in September, continuing an expensive trend. Over the past year, food has increased 5.4%. Housing costs increased 3.5% over the same period.

Inflation doesn’t look transitory

One of the key tasks of the Fed is to keep price growth stable, and Fed officials have told anyone who listens to expect inflation to rise in the near term as the economy continues. would return to normal. They also say that current inflationary pressure should give way to healthier price growth in the longer term.

But these calls for “transient” high inflation have been undermined by consistently high prices. In a recent press conference following the Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Jerome Powell said “transient” was a difficult thing to define.

“So transient is a word that people have different understandings of,” he said. “Really for us, what the transient has meant is that if something is transient, it won’t leave behind higher inflation permanently or very persistently.”

Nonetheless, Fed officials admitted that inflation persisted longer than expected, regardless of your definition of “transient.”

Workers particularly feel the sting. Saying that the price increase will moderate once the economy returns to normal is easier than experiencing the increase, especially since October wages were only up 4.9% from to the previous year.

Inflation gains and the Covid-19 recession

As high inflation became a problem in the spring of 2021, the Fed laid out a few reasons for what was happening, including base effects, supply chain issues, and a tough job market.

Basic effects are perhaps the most intuitive reason for the strong price growth. That is, prices fell dramatically throughout 2020 as state governments imposed lockdowns in an attempt to slow the spread of Covid, and therefore any year-to-year comparison had to sound strange when people started spending more when life was getting back to normal

This was most evident at the start of the cost of airline tickets.

Once the Covid-19 pandemic was triggered, demand for travel plummeted, leading to lower prices. In April 2020, for example, air fares fell 24% year-on-year, and they would spend most of the rest of 2020 at these depressed levels.

But once the year is over, those year-over-year comparisons change: the June IPC report, for example, compared airline prices during vaccine days to what they were after the strike. of Covid-19. So it’s not too surprising that airline prices in June 2021 were almost 25% higher than a year ago, if only because so few people were buying tickets at the time.

This was one of the key points the Fed had tackled: With vaccines widely available, more people had to fly. Yes, airline prices are much higher than a year ago, but they remain cheaper than where they were before the pandemic.

In fact, airline ticket prices have come down after peaking in June and are now 5% cheaper than in October 2020.

Yet headline inflation is skyrocketing, so something else has to happen.

Supply Chain the problems continue to disrupt prices. Take used cars and trucks: as prices have come down as the economy recessionIt’s not that used cars and trucks have become cheaper than in February 2020. In fact, they’ve never been so expensive.

The reasons for this increase are of course linked to the pandemic. Supply is limited due to production of new cars blocked by a continuous shortage of chips, people who keep their leases longer, and car rental companies – a major source of used cars – have less to offload after limiting their inventory when the pandemic struck. Plus, people who delayed buying cars last year are suddenly fighting over cars today.

The Fed has warned the public of these and other supply chain issues, saying it will take time for sectors of the economy to return to normal. Once these issues are resolved, the Fed says, inflation will stop growing so quickly. The problem is, these folds will likely last over a year, rather than a few months.

Labor issues are another source of concern. Tens of millions of Americans lost their jobs (or left them voluntarily) during the Covid recession, which resulted in the production of much less stuff. U.S. bank accounts were bolstered by expanded unemployment insurance and direct stimulus measures, but those dollars ultimately sought fewer goods and services because fewer people were working.

Businesses, meanwhile, struggled throughout 2021 to hire enough workers to meet demand, and the labor force participation rate is 1.7 percentage points lower than before the pandemic.

Should we be worried about high inflation?

According to the Fed, there was only to be a transitional period of high inflation. Supply chains and businesses only needed a little time to resolve the knots involved in reopening the global economy. Although the specific definition of “transient” has not been firmly established, it has been referred to in terms of months; things would return to normal at the end of the summer or maybe during the winter.

Now we know that “transient” is much longer than that. Moreover, the high prices are not specific to cars or air travel. Food, shelter and energy price shot through the rough.

This is one of the reasons the University of Michigan consumer sentiment gauge fell to lows seen just after Covid-19 began to spread across the country.

The Fed recently announced that it will buy fewer bonds over time, which should take some of the fuel out of the economy. But with the labor market yet to recover from its pandemic losses, it will be some time before the Fed hikes interest rates, a typical maneuver used when inflation soars.

But it is not clear that there is a monetary policy solution at this inflationary time.

“The Federal Reserve is starting to cut its stimulus measures and may be forced to raise interest rates earlier due to rising inflation, but rate hikes may not be enough to reverse inflation as Sources of inflation involve supply chain bottlenecks and budget spending, which are two areas the Federal Reserve does not control, ”said Nancy Davis, founder of Quadratic Capital Management.

Consumers will therefore likely have to face higher prices for longer than expected, and investors will have to hope that the Fed does not raise interest rates faster than expected, scaring the markets.

Everyone is now wondering how transient this transient inflation spike is and how long average Americans will put up with it.

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