Monday, September 25

Inflation rate rises 7.5 percent in January compared to last year

In the shorter term, data released Thursday by the Bureau of Labor Statistics also showed prices rose 0.6 percent in January compared with December, same as the November to December inflation rate, which officials revised upward slightly.

As with previous months, higher prices reached into just about every sector of the economy, leaving households to feel the strain at the deli counter, shopping mall and just about everywhere else.

“I’m worried,” said Diane Swonk, chief economist at Grant Thornton. She expects inflation to begin falling in the next few months but she warns that it might be difficult to bring price growth down to pre-pandemic levels.

“The Fed is counting on inflation abating somewhat on its own,” Swonk said. “The problem is that even as inflation abates, it may not cool enough not to burn. Some of the inflation we are seeing is becoming more entrenched in the service sector. There is no playbook for derailing inflation in this environment.”

Increases in the cost of food, electricity and shelter helped drive inflation higher in January with household furnishings, clothing and medical care becoming costlier, while used car costs continued to spiral, albeit at a slower pace than in prior months.

Compared to 2021, the energy index rose 27 percent, and food rose 7 percent. The cost of food rose in January compared to December, with cereals and baked goods increasing the most. . Fruits and vegetables also edged up.

Several categories posted their largest price increases ever, including frozen and freeze dried prepared foods, cakes, cupcakes and cookies. Prices for vending machines, household furnishings and supplies, tools, household cleaning products, tires, medical services and video and audio services were also costlier than ever.

Rent costs rose from December to January, climbing at a slightly faster pace than the previous two months. Economists have been especially worried about rising home and rent costs, which can get locked in through long-term contracts and may not improve after supply chains clear up.

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A drop in gasoline prices over the past month was offset by a sharp jump in monthly electricity prices. It’s the fastest pace that electric bills have risen in 16 years.

Sharp inflation has undermined otherwise robust recovery. the economy has rebounded remarkably since plunging into recession almost two years ago. Over the past 12 months, the US economy has added nearly 7 million jobs and average hourly earnings have climbed 5.7 percent. The overall economy has shown relative resilience to new waves of the coronavirus, and stocks have bounced back from their volatile start to 2022.

High inflation has left an indelible mark on the economy, including the highest price increases for housing, food and energy that many workers have ever seen. And questions loom about how or whether policymakers will be able to rein prices back in without slowing the recovery or even causing another recession. The answers will have enormous implications for policymakers at the Federal Reserve and in the Biden administration.

The White House has been touting its actions to lower prices, including targeting corporate consolidation to help create product markets that are more competitive.

“The president has been clear that this is really a challenge for families’ budgets, and one he is working to address as quickly as possible,” David Kamin, deputy director of the National Economic Council told The Post. “That’s reflected in our actions we’re taking to address supply chains and kitchen table costs, through the kinds of investments we saw in the Rescue Plan. It’s why we’re also focused on increasing competition to get the lower prices Americans deserve.”

But inflation has provided a blistering political handicap for Biden, and a litmus test for how many Americans judge the economy. Republicans largely blame Democrats’ $1.9 trillion American Rescue Plan for overheating the economy, and the GOP is set to hammer on inflation going into the midterm elections this fall.

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“Joe Biden’s economy has Americans drowning in record-high inflation,” said Sen. John Barrasso (R-Wyo.). “People in Wyoming are now paying sky-high prices for gas, groceries, heating bills and rent. As a result, they are having to change how they live while Democrat-driven inflation keeps eating away at their paychecks.”

All signs suggest the Federal Reserve, which is in charge of keeping prices stable, will raise interest rates at its next policy meeting in March. Higher interest rates make it more expensive for households and businesses to borrow money, which slows spending and can cool off a hot economy and curb price growth.

Momentum in the job market, combined with soaring inflation, has pushed Fed officials to suggest they plan to raise interest rates higher and faster than officials previously anticipated. The Fed is expected to end its sprawling asset purchase program next month and raise rates multiple times in 2022, with some analysts predicting as many as five hikes.

Fed officials still say they expect inflation will fall later this year, especially if supply chains clear their backlogs and consumer demand eases to more normal levels.

“There are multiple forces which should be working over the course of the year for inflation to come down,” Fed Chair Jerome H. Powell said last month. “We do realize that the timing and pace of that are, are highly uncertain and that inflation has persisted longer than we thought. And, of course, we’re prepared to use our tools to assure that higher inflation does not become entrenched.”

Swonk, the economist, said she is worried it might already be too late. “The Fed doesn’t have a good record of derailing an actual surge in inflation without rate hikes bleeding into the unemployment,” she said.

As wages rise, inflation may already be getting entrenched into the economy. Colgate-Palmolive, which sells everything from toothpaste to Science Diet pet food, recently announced price hikes to cover soaring costs.

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CEO Noel Wallace said on a recent earnings call that he expected the price of raw materials to peak in the first three months of the year, and that the company would be able to increase profits later in the year as recent price hikes took effect and raw -material costs began to fail. Because prices are rising everywhere, Wallace said, there is a lower risk of customers switching to a cheaper competitor.

Houston-based Sysco, a major supplier of food for restaurants, hospitals and other institutions, has remained in strong financial shape despite double-digit growth in food prices. It has been able to charge customers more while winning significant new business with its lower-cost products. On a recent earnings call, Aaron Alt, the firm’s chief financial officer, was asked whether inflation had peaked. I have demurred.

“We are continuing to see elevated levels of inflation. And as much as I would like to call when the down point will be,” Alt said, it’s “impossible for us to do.” At the very least, he said, he expected inflation to remain elevated through June.

Economists say the economy has a long way to go before prices settle back to what’s considered typical inflation. The pandemic economy has been anything but predictable, and new coronavirus variants have weighed on supply chains, raised workers’ exposure risk to the virus and complicated households’ ability to find child care.

“It doesn’t happen this year, it just doesn’t, and I think everyone needs to be honest about that,” said Douglas Holtz-Eakin, a former economic adviser to George W. Bush and John McCain. “[The Fed] is talking a big game, but they’ve had the foot on the accelerator for years now, and they haven’t done anything yet.”

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