UNITED STATES

US inflation explained: Why it’s so high (7.5%) and when it may ease

Feb 10, 2022, 10:28 AM
Inflation explained...
A man looks at beef in the meat department at Lambert's Rainbow Market, on June 15, 2021 in Westwood, Mass. The Labor Department said Thursday, Feb. 10, 2022, that consumer prices jumped 7.5% last month compared with a year earlier, the steepest year-over-year increase since February 1982. The acceleration of prices ranged across the economy, from food and furniture to apartment rents, airline fares and electricity. (AP Photo/Charles Krupa)
(AP Photo/Charles Krupa)

WASHINGTON (AP) — Last year, it was a nasty surprise. And it wasn’t supposed to last. But now, inflation has become an ongoing financial strain for millions of Americans filling up at the gas station, lined up at a grocery checkout lane, shopping for clothes, bargaining for a car or paying monthly rent.

For the 12 months ending in January, inflation amounted to 7.5% — the fastest year-over-year pace since 1982 — the Labor Department said Thursday.

Even if you toss out volatile food and energy prices, so-called core inflation jumped 6% over the past year. That was also the sharpest such jump in four decades.

Consumers felt the price squeeze in everyday routines. Over the past year, prices rose 41% for used cars and trucks, 40% for gasoline, 18% for bacon, 14% for bedroom furniture, 11% for women’s dresses.

The Federal Reserve didn’t anticipate an inflation wave this severe or this persistent. In December 2020, the Fed’s policymakers had forecast that consumer inflation would stay below their 2% annual target and end 2021 at around 1.8%.

But after having been an economic afterthought for decades, high inflation reasserted itself last year with brutal speed. In February 2021, the government’s consumer price index was running just 1.7% ahead of its level a year earlier. From there, the year-over-year price increases accelerated steadily — 2.7% in March, 4.2% in April, 4.9% in May, 5.3% in June.

By October, the figure was 6.2%, by November 6.8%, by December 7.1%.

For months, Fed Chair Jerome Powell and others characterized higher consumer prices as merely a “transitory” problem — the result, mainly, of shipping delays and temporary shortages of supplies and workers as the economy rebounded from the pandemic recession much faster than anyone had anticipated.
Now, many economists expect consumer inflation to remain elevated well into this year, with demand outstripping supplies in numerous areas of the economy.

“Inflation remains the single largest near-term challenge to the economy,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.

“Although price pressures are expected to ease as the year progresses, inflation will remain above the Fed’s 2% target for some time to come.”

So the Fed has radically changed course. Last month, the central bank signaled that it will begin a series of rate hikes in March. By doing so, the Fed is moving away from the super-low rates that helped revive the economy from 2020’s devastating pandemic recession but that also helped fuel surging consumer prices.

WHAT’S CAUSED THE SPIKE IN INFLATION?

Good news — mostly. When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in last year’s April-June quarter.

Everyone braced for more misery. Companies cut investment and postponed restocking. A brutal recession ensued.

But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by vast infusions of government aid and emergency intervention by the Fed, which slashed interest rates, among other things. By spring of last year, the rollout of vaccines had emboldened consumers to return to restaurants, bars, shops and airports.

Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings — a near record 10.9 million in December — or buy enough supplies to meet customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became seized up.

With demand up and supplies down, costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic.

But critics, including former Treasury Secretary Lawrence Summers, blamed in part President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own.

The Fed and the federal government had feared an agonizingly slow recovery like the one that followed the Great Recession of 2007-2009.

HOW LONG WILL IT LAST?

Elevated consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and tacked on 467,000 more in January — means that many Americans can continue to splurge on everything from lawn furniture to electronics.

Many economists foresee inflation staying well above the Fed’s 2% target this year. But relief from higher prices might be coming. Jammed-up supply chains are beginning to show some signs of improvement, at least in some industries. The Fed’s sharp pivot away from easy-money policies toward a more hawkish, anti-inflationary policy could slow the economy and reduce consumer demand. There will be no repeat of last year’s COVID relief checks from Washington.

Inflation itself is eating into household purchasing power and might force some consumers to shave back spending.

Omicron or other COVID’ variants could cloud the outlook, either by causing outbreaks that force factories and ports to close and disrupt supply chains even more or by keeping people home and reducing demand for goods.

“It’s not going to be an easy climb down,” said Sarah House, senior economist at Wells Fargo. “We’re expecting CPI to still be roughly 4% at the end of this year. That’s still well above what the Fed would like it to be and, of course, well above what consumers are used to seeing.”

HOW ARE HIGHER PRICES AFFECTING CONSUMERS?

A strong job market is boosting wages, though not enough to compensate for higher prices. The Labor Department says that hourly earnings for all private-sector employees fell 1.7% last month from a year earlier after accounting for higher consumer prices. But there are exceptions: After-inflation wages were up more than 10% for hotel workers and more than 7% for restaurant and bar employees in December from a year earlier.

Partisan politics also colors the way Americans view the inflation threat. With a Democrat in the White House, Republicans were nearly three times as likely as Democrats (45% versus 16%) to say that inflation is having a negative effect last month on their personal finances, according to a University of Michigan survey.

Today’s Top Stories

United States

President Joe Biden speaks during a news conference on the final day of the NATO summit in Madrid, ...
DARLENE SUPERVILLE and ZEKE MILLER Associated Press

Biden says transatlantic alliance has adapted to new threats

Biden's comments came at a press conference in Madrid at the conclusion of the annual meeting of NATO leaders and after he attended a summit with the Group of Seven advanced democratic economies in the Bavarian Alps.
3 days ago
A Rite Aid logo is displayed on its store...
HALELUYA HADERO, AP Reporter

Amazon, Rite Aid cap purchase of emergency contraceptives

Retailers limiting purchases is standard practice that helps retailers prevent stockpiling and reselling at higher prices.
3 days ago
New York Gov. Kathy Hochul stands with Lieutenant governor Antonio Delgado during their primary ele...
STEVE PEOPLES AP National Politics Writer

Takeaways from first primaries since Roe v. Wade overturned

The abortion debate consumed the nation this week, but there was no race where it mattered more than Colorado's Republican primary for the U.S. Senate, where businessman Joe O'Dea became one of the only abortion-rights-supporting Republicans in the nation to win a statewide primary this year.
4 days ago
Freshly pressed vinyl records are produced in a stamper at the United Record Pressing facility Thur...
DAVID SHARP Associated Press

Manufacturers struggle to keep pace with vinyl record demand

The Recording Industry Association of America says record album sales grew 61% last year — and reached $1 billion for the first time since the 1980s.
6 days ago
U.S. Representative Adam Kinzinger (R-IL) speaks during the fifth of eight planned public hearings ...
Annie Grayer, CNN

January 6 committee unexpectedly adds new hearing for Tuesday

The announcement came as a surprise to many as the committee had said it was not going to resume its hearings until mid-July.
6 days ago
Bodycam footage from the Moab Police Department that shows them talking with Brian Laundrie is seen...
Jamiel Lynch and Chenelle Woody, CNN

Lawyer releases pages from Brian Laundrie’s notebook in which he admits to killing Gabby Petito

Eight pages of Brian Laundrie's notebook were released Friday by the Laundrie family attorney. The notebook was found near Brian Laundrie's remains.
9 days ago

Sponsored Articles

Tax Harassment...
Jordan Wilcox

The best strategies for dealing with IRS tax harassment | You have options!

Learn how to deal with IRS tax harassment. This guide will teach you how to stop IRS phone calls and letters, and how to handle an IRS audit.
spend a day at Bear Lake...
Bear Lake Convention and Visitors Bureau

You’ll love spending the day at Bear Lake | How to spend a day at Bear Lake

Bear Lake is a place that needs to be experienced. Spend a day at Bear Lake.
Curb Appeal...
Price's Guaranteed Doors

How to have the best of both worlds for your house | Home security and curb appeal

Protect your home and improve its curb appeal with the latest security solutions like beautiful garage doors and increased security systems.
Prescription opioids can be disposed of during National Prescription Take Back Day...
Know Your Script

Prescription opioid misuse | How to protect your family from the opioid epidemic

Studies have shown that prescription opioid misuse has increased since COVID-19. So what do you need to know about these opioids?
national heart month...
Intermountain Healthcare

National Heart Month: 5 Lifestyle Changes to Make Today to Keep You Heart Healthy

Heart disease is the leading cause of death for both men and women. One person dies every 36 seconds in the United States from cardiovascular disease
Joseph Smith Memorial Building...
Temple Square

The Joseph Smith Memorial Building is an icon of Salt Lake City | Why hosting an event at this beautiful location will make you a hero this year

Here's why hosting an event at the iconic Joseph Smith Memorial Building in downtown Salt Lake City will make you a hero this year.
US inflation explained: Why it’s so high (7.5%) and when it may ease