Prices rise much faster than anticipated
The Federal Reserve Rate Increases and the Inflationary Rates of Goods and Services in the Light of the November Outburst
In November, the Federal Reserve reported that price increases continued to moderate, giving another indication that the period of high prices is over.
The Bureau of Economic Analysis said the Personal Consumption Expenditures price index went up by 6.2% in August, compared to the same month a year ago. That was viewed as a driver behind the central bank’s decision to raise its benchmark rate by three-quarters of a percentage point for the third time in a row earlier this month.
The August Consumer Price Index, another major inflation gauge, surprised economists in mid-September with a core reading for the month that rose instead of fell as expected.
For much of last year, the Federal Reserve believed that prices would cool off on their own, once supply chain snarls caused by the pandemic came untangled. The central bank expected inflation to be less stubborn than it turned out to be. This spring, the Fed began raising interest rates in an effort to tamp down demand and bring prices under control.
Prices were pushed higher by large increases in the cost of food and, to a lesser extent, at restaurants and hotels, in September. The yearly rise in food prices was the largest in more than 40 years, according to the Office for National Statistics. High energy costs were still contributing to inflation growing at its fastest pace in decades. Core inflation, which excludes food and energy prices, rose from 6.0 percent in August to 6.5 percent in September, as the price increases are widespread across goods and services.
Still, Fed officials and Wall Street analysts will be more closely watching the monthly figures, including what happened between August and September. While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time.
As the supply chain has improved, inflation on items like goods has moderated in recent months.
The Federal Reserve has already raised interest rates by 4.5 percentage points since last March in an effort to curb inflation. The Fed is expected to make two more rate hikes, totaling 5 percentage points in the coming months.
Fed policymakers will meet this week and are expected to raise their rates by another half percentage point, in an effort to bring prices under control.
Consumer prices last month were 6.4% higher than a year ago, according to a report from the Labor Department Tuesday. That’s the lowest annual inflation reading since October 2021.
Rents are going up fast. The cost of renting a primary residence climbed a brisk 7.2 percent in the year through September. Housing costs matter as they make up a big chunk of overall inflation and typically climb around 3 percent per year.
Other services are becoming more expensive. Prices are going up a lot for a lot of services. That’s worrying, because it suggests that wage increases — a major cost for service providers — may be feeding into higher prices.
Consumer prices in Britain rose 10.1 percent in September from a year earlier, continuing their steep climb as the nation grapples with rapidly increasing food prices, high energy costs and political uncertainty.
It’s another sign of the stickiness of inflation that politicians and policymakers are facing all over the world. It is encouraging central bankers to go for higher interest rates in order to get inflation under control, so that they won’t let rapid price increases become entrenched in the economy.
More than one in three voters cited inflation as their most pressing priority, according to the latest NPR/PBS Newshour/Marist poll. “Preserving democracy” was not a priority. Republicans were thought to be more effective at dealing with inflation than Democrats.
Inflation was of little concern when President Biden first took office. Although the pandemic had triggered isolated price increases for things like lumber — the overall cost of living was climbing at less than 2% per year.
The incoming administration was more concerned about jobs — fearing a repeat of the sluggish recovery that followed the global financial crisis. The unemployment rate in January of last year was 6.4% — down from nearly 15% in the early months of the pandemic. The economy had lost over a million jobs before Biden was sworn in.
The economic relief bill was quickly passed by congress and included direct payments of up to $1400 to most adults and expanded unemployment benefits.
The success was due to the economic stimulation. Biden has led to the creation of more than 10 million jobs. But Republicans blame the aggressive relief bill — which passed with no GOP support — for fueling runaway prices.
What Have We Learned in the First Five Years of High Inflation? Why We Are Here, How We Are Going, and Why We Need to Be Here
Other factors have undoubtedly contributed to high inflation, including the lingering effects of the pandemic and Russia’s invasion of Ukraine. The surge in energy costs due to the Ukraine war has caused Inflation to be higher in the Eurozone and the UK than in the US.
“Now the bathtub is overflowing,” said former Treasury Secretary Larry Summers, who had cautioned his fellow Democrats about just such an outcome. It’s simpler to stop a bathtub from flooding than it is to get the water back.
Families are what we’ve got to do in government. You live within your means,” said Scott, who chairs the Republican Senate Campaign Committee. We need to figure out how to produce energy in this country safely.
In June, when world crude oil prices were high, the average price of gasoline nationwide hit a record high of $5.01. According toAAA, gas prices have retreated from about $4 to around $3.80/gallon.
Airfares are going up a lot. US gas prices are higher than they’ve ever been at this time of year. Hotels and rental cars rates have increased from where they were a year ago.
Airfare: Data from aviation analytics firm Cirium shows the number of flights scheduled for November and December is down 15% from the same months in 2019. Many of those missing flights previously were flown by smaller regional carriers serving smaller airports, and some of those airports have since lost service altogether. The number of seats available was down in the first quarter of this year, even with larger planes.
A surge in Covid-19 cases at the end of 2021 depressed demand for leisure travel, but this year it’s positively robust, according to the airlines and industry experts.
Scott Keyes said holiday travel had come back as strong as ever and leisure travel was why it had recovered. As we’re going to see pretty soon, there were a lot of people wanting to travel over Labor Day and July 4.
The prices are still more expensive than a year ago. Typically, the price of gas is at its seasonal low at the end of the year.
Americans have seen racing inflation eat away at their savings and credit card debt for a year. A key source of pain was costly gasoline.
The biggest year-over- year price cuts for electronics and computers in two years boosted demand in November, according to Adobe. Toy prices fell 7.7% year over year and sporting goods prices dropped 5.7%.
As consumers spend on travel and experiences instead of buying couches and clothes, retailers with excess inventory will keep marking them down into the end of the year.
While food and energy prices are notoriously volatile, the prices of many other goods appear to be stabilizing. Used car prices fell 2.9% between October and November, while new car prices were flat.
The overall inflation rate declined slightly last month as gas and grocery prices moved in opposite directions. The consumer prices were up 7.1% in the month of November compared to a year ago.
Inflationary Results from the Labor Department: Preliminary Results for the First Five-Year Public Works and Services Expansions
The Labor Department released inflation data Tuesday, just before the Federal Reserve prepares to raise interest rates on Wednesday.
In the past few months, gasoline prices have dropped 2% and gas is selling for less than a year ago.
A box of romaine lettuce sold in a wholesale setting is costing up to $100 because of growing problems in California and high transportation costs.
The production of lettuce was affected in the Salinas Valley. Diesel fuel used to truck vegetables costs more than $5 a gallon even if gasoline prices have fallen.
“People are now, as a result of high rent, doubling up again, so we’re seeing an increase in the number of people moving in with roommates,” said CoreLogic economist Selma Hepp.
The consumer price index isn’t yet fully reflecting the slowdown in housing costs because rents are only reflected slowly in the official inflation data.
The Fed is also keeping a close eye on the price of services, such as haircuts and restaurant meals. Those prices are largely driven by labor costs, and are therefore less likely to come down than goods prices.
The Bureau of Labor Statistics reported that the year-over-year inflation rate hit a peak of 9.1% in June, but since then has slowed to 7.1% for the year.
Spending continued to rise, but at a slower pace than in the past, in November. Spending was up in November from the previous month. Personal income increased by 0.4% in November, compared to 0.7% in October.
The last major inflation gauge to be released in 2022, the November PCE report, provided a snapshot of an economy in transition. Tasked with reining in the highest inflation since the early 1980s, the Fed has undertaken a series of blockbuster interest rate hikes to squelch demand.
The economy is moving in the right direction, but not quickly enough, despite the Federal Reserve thinking differently by the end of 2022, said a statement from a chief economist. “Higher interest rates are weighing on consumer spending, particularly for durable goods, and inflation is slowing.”
However, inflation within the services sector has been a little “sticky,” and not abating as quickly. Friday’s PCE report showed the services index posted a monthly increase of 0.4% – unchanged from October’s rate – and a year-over-year increase of more than 11%, Faucher noted.
The Fed is concerned that strong wage growth could fuel further increases in services prices, as housing costs are quickly reversing, he added.
Powell said that they expected to see significant declines in inflation in the years to come. But he cautioned it would likely be 2024 before inflation returns to the Fed’s target rate of 2%.
Declining Orders for Made Products in the United States and Implications for the Inclusive U.S. Consumer Confidence Index
The Commerce Department released a report on Friday showing that new orders for manufactured goods fell in November.
Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. Excluding transportation, new orders increase 0.2%.
Diane Swonk, chief economist for KPCB, said Friday that core durable goods orders slowed but did not contract as a result of growing unease about the economy. The prelim reading of manufacturing activity for December suggests that it will contract further in the year end. A cold winter expected for the manufacturing sector.
Consumer sentiment came in at 59.7 in December, up from a preliminary reading of 59.1 but still below the final reading of 56.8 in November.
Consumers clearly welcomed the recent easing of inflation, according to the director of the Surveys of Consumers. Consumers have reserved judgement about whether trends will continue, even though sentiment appears to haveturned a corner from its all-time low.
The consumer confidence index, a measure of how consumers are feeling about the economy, came in at its highest level in more than a year.
Consumer Demand Induced by Inflation and a Supressed Consumer Confidence: Best Buy, Walmart and Delta Embedded Retail Markets
In the past year, several major electronics got less expensive, including phones, TVs and computers.
Earlier in the year, chains like Best Buy and Walmart stocked up on merchandise, preparing for supply chain shortages and what they projected to be robust consumer demand. Inflation and a slump in consumer confidence caused their plans to be derailed.
“In toys, sporting goods, apparel, categories like that, prices have come down more aggressively,” Walmart CEO Doug McMillon said in an interview on CNBC in December. “We’re still inflated but we’re not inflated nearly as much as we are in the other categories.”
In March, Delta president Glen Hauenstein called the spike in demand “unprecedented,” adding “I have never seen … demand turn on so quickly as it has after Omicron,” the Covid-19 variant that caused cases to spike last winter.
Many airlines reported record revenue in April, May and June thanks to high airfares and full planes as travelers returned in full force two years into the pandemic.
Due to high transportation and grain prices in the United States, flour got 24.9% more expensive. Crop disease caused a 19.8% increase in lettuce.
In the period, grocery prices grew at a slower rate but many consumers found the higher prices for thriftier alternatives to restaurants more appealing and thus they found it more convenient to buy them. Food away from home became 8.5% more expensive in 2022, with many restaurants hiking up menu prices in order to mitigate their own higher input costs.
Fuel and Car Prices as a Brake on Inflationary Dynamics in the First Two Months of February and March — Is Everything Else?
“There’s been an expectation that it will go away quickly and painlessly, and I don’t think that’s at all guaranteed,” Federal Reserve chairman Jerome Powell said last week. “If we have done enough, we’ll have to do more rate increases and look at other places to see if we’ve done enough,” he said.
During the first two weeks of February, there has been a drop in gas prices, but they aren’t able to keep inflation in check.
“We are entering the higher-priced spring and summer driving seasons, so drivers should prepare for that,” said Gladden. “Uncertainty around the economy will be a factor that will likely cause it to be a volatile year.”
Used car prices have also acted as a brake on inflation, falling 8.8% last year and another 1.9% in January. But signals from the wholesale market suggest used car prices could jump again in the coming months.
