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The Day – EXPLAINER: Why US inflation is so high and when it can come down

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WASHINGTON (AP) — Last year was a bad surprise. And it wasn’t meant to last. But now inflation has become a lifelong financial strain for millions of Americans who fill up at the gas station, line up at the grocery store checkout, buy clothes, negotiate for a car or pay a monthly rent.

For the 12 months ending in January, inflation was 7.5% — the fastest year-over-year pace since 1982 — the Labor Department said Thursday. Even if you forget about volatile food and energy prices, so-called core inflation has jumped 6% over the past year. It was also the biggest leap in four decades.

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

The Federal Reserve had not anticipated such a severe or persistent wave of inflation. In December 2020, Fed policymakers had forecast consumer inflation to remain below their annual target of 2% and end 2021 at around 1.8%.

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

In October the figure was 6.2%, in November 6.8%, in December 7.1%.

For months, Fed Chairman Jerome Powell and others have dismissed rising consumer prices as merely a “transitional” problem — the result, primarily, of shipping delays and temporary shortages of supplies and supplies. of workers as the economy rebounded from the pandemic recession much faster than anyone expected. .

Today, many economists expect consumer inflation to remain high for much of the year as demand outstrips supply in many parts of the economy.

“Inflation remains the biggest near-term challenge for the economy,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Although price pressures should ease as the year progresses, inflation will remain above the Fed’s 2% target for some time to come.”

The Fed has therefore radically changed course. Last month, the central bank announced that it would begin a series of rate hikes in March. In doing so, the Fed is moving away from the ultra-low rates that helped revive the economy after the devastating pandemic recession of 2020, but also helped fuel soaring consumer prices.

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WHAT CAUSED THE PEAK INFLATION?

Good news – mostly. When the pandemic crippled the economy in the spring of 2020 and shutdowns began, businesses closed or reduced hours and consumers stayed home as a health precaution, employers cut 22 million breathtaking jobs. Economic output plunged at a record annual rate of 31% in the April-June quarter of 2020.

Everyone is preparing for more misery. Companies have reduced their investments and postponed restocking. A brutal recession ensued.

But instead of sinking into a protracted downturn, the economy rebounded strongly and unexpectedly, fueled by large injections of government aid and the Fed’s emergency intervention, which notably cut interest rates. ‘interest. In the spring of last year, the rollout of vaccines encouraged consumers to return to restaurants, bars, shops and airports.

Suddenly, businesses had to scramble to keep up with demand. They couldn’t hire fast enough to fill vacancies — a record close to 10.9 million in December — or buy enough supplies to meet customer orders. As business picked up, ports and freight yards could no longer handle the traffic. Global supply chains have seized up.

With rising demand and falling supply, costs have risen. And companies found they could pass those higher costs on in the form of higher prices to consumers, many of whom had managed to save a ton in savings during the pandemic.

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

The Fed and the federal government had feared a painfully slow recovery like the one that followed the Great Recession of 2007-09.

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HOW LONG WILL IT LAST?

High consumer price inflation is likely to persist as businesses struggle to meet consumer demand for goods and services. A recovering job market — employers created a record 6.7 million jobs last year and added 467,000 more in January — means many Americans may continue to splurge on everything, from garden furniture to electronics.

Many economists expect inflation to stay well above the Fed’s 2% target this year. But relief from higher prices could come. Blocked supply chains are starting to show signs of improvement, at least in some industries. The Fed’s sharp shift away from easy money policies towards 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 eats away at household purchasing power and could force some consumers to cut spending.

Omicron or other COVID variants could cloud the outlook, either causing outbreaks that force factories and ports to close and further disrupt supply chains, or keeping people at home and reducing demand. merchandise.

“It’s not going to be an easy descent,” said Sarah House, senior economist at Wells Fargo. “We expect the CPI to still be around 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.

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HOW DO HIGHER PRICES AFFECT CONSUMERS?

A strong labor market drives up wages, but not enough to offset rising prices. The Labor Department says hourly wages for all private sector employees fell 1.7% last month from a year earlier, after factoring in rising consumer prices. But there are exceptions: Post-inflation wages rose more than 10% for hotel workers and more than 7% for restaurant and bar workers in December from a year earlier.

Partisan politics also colors how Americans perceive the inflationary threat. With a Democrat in the White House, Republicans were nearly three times more likely than Democrats (45% vs. 16%) to say inflation had a negative effect on their personal finances last month, according to a survey by the University of Michigan.