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Earlier this month, shoppers visited a mall in Santa Monica, Calif. Consumer confidence has been eroded by high inflation as individuals grapple with growing prices. Credit… The New York Times’ Philip Cheung
With yet another piece of bad news, Federal Reserve officials are rounding out a year marked by unusually strong inflation: the price index they constantly monitor hit its highest level since 1982.
The Commerce Department said on Thursday that the Personal Consumption Expenditures price index, which is the one the Fed formally targets when it strives for 2 percent annual inflation on average over time, increased 5.7 percent in November from a year earlier. Part of the rise was due to higher gasoline costs, which rose rapidly in November but have since stabilized, but a so-called core index, which excludes food and fuel prices, also rose considerably, to 4.7 percent.
The huge rise in inflation this year, as well as the fact that it has persisted, has policymakers and analysts pondering what will happen in 2022.
Rapidly increasing prices are continuing longer than policymakers had intended and have recently become more widespread. As demand soared and overburdened transportation routes struggled to keep up, major price rises were generally reserved for commodities in low supply earlier this year. They’ve lately expanded into areas such as rent, which may persist for a longer period of time.
Customers saved less in November and their consumption hardly budged after correcting for inflation, which might just be a hint that consumers concluded their Christmas shopping early due to supply chain snarls, according to statistics published on Thursday on earnings and spending. Slower spending might ultimately weigh down price rises if demand remains weak. However, the United States may find itself in an unfavorable scenario in which growth is sluggish and inflation is high.
“Consumers are able to buy less because prices are increasing, which is slowing real spending growth,” said Andrew Hunter, senior U.S. economist at Capital Economics. He believes that this will ultimately force prices down, but that “inflation is likely to be higher than the Fed intends for a long.”
The new inflation number confirms what a more recent and comparable indicator — the Consumer Price Index — had already shown: a price increase.
It does so in order to maintain pressure on Fed officials, who are entrusted with keeping inflation reasonable and preparing the economy for full employment, and who have become more concerned about the price rise. This month, they shifted policy, speeding up preparations to reduce economic stimulus and ready to hike interest rates early next year if required. Higher interest rates may stifle demand for everything from houses to vehicles, slowing the economy and keeping inflation in check.
What comes next is the key issue for central bank officials — and the Biden administration. With the Omicron form of the coronavirus spreading over the globe, snarled supply networks are unlikely to return to normal anytime soon. Increasing housing costs, on the other hand, might keep inflation high even as some of the year’s most unpleasant developments, such as a jump in used-car prices linked to a computer chip shortage, ease.
Because gas prices have lately eased, Mr. Hunter believes that the headline inflation index will peak in November, but the core measure will continue to rise for a few months before slowing.
“We need to be modest here,” he remarked, adding that “we probably believed we were at top” “one or two times last year.”
According to the Fed’s most current economic estimates, inflation will fall to 2.6 percent by the end of next year, but that will still be far over their target of 2 percent. None of the Fed’s 18 members anticipate inflation to fall below 2% in the next year.
Consumer confidence has been eroded by high inflation as individuals grapple with growing prices, despite the fact that job opportunities significantly outnumber available employees and incomes are rising.
“It’s a sad thing for working and middle-class folks,” President Biden said on Tuesday at the White House, adding, “It truly hurts.”
The government is attempting to pull as many levers as it can, such as expanding oil and gasoline supplies and keeping ports open longer to clear cargo backlogs.
However, expenses are rising since people have amassed significant savings as a result of periodic government stimulus payments and months spent at home. People have been splurging on items as a result of the illness, which has caused many people to forgo travel and other services. This has given businesses the ability to increase prices without losing clients.
The Fed’s goal is to counteract demand-driven inflation pressures.
“While the sources of increased inflation have been primarily linked to the dislocations created by the epidemic, price rises have now expanded to a wider range of goods and services,” said Fed Chair Jerome H. Powell at a press conference last week. If prices continue uncomfortably high, he believes the Fed will do more to keep them in check.
Mr. Powell said, “We acknowledge that rising inflation causes substantial hardship, particularly for those least able to afford the increasing expenses of basics like food, shelter, and transportation.” “We are dedicated to achieving pricing stability.”
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