After a difficult couple of years, Americans are now feeling the pinch of higher prices. The cost of fuel, utility bills, weekly grocery shops, and so forth are skyrocketing, hurting consumer wallets just as they prepare to spend big for the holiday season.
On Nov. 10, the Bureau of Labor Statistics (BLS) revealed that consumer prices rose 0.9% in October and 6.2% compared to a year earlier. That reading marks the fastest annual jump since December 1990 and a substantial leap above the Federal Reserve's target inflation rate of 2%.
- The cost of everyday essentials is skyrocketing, hurting consumer wallets just as they prepare to spend big for the holiday season.
- Consumer prices rose 6.2% in October compared to a year earlier, the fastest annual jump since December 1990.
- The Federal Reserve, which is responsible for keeping price growth stable, considers 2% to be a healthy rate of inflation.
- Most economists blame rising prices on COVID-19 and are confident that inflation will soon ease as supply chain bottlenecks and the post-lockdown urges to buy these things subside.
- Others are less positive and believe that the Fed needs to start aggressively hiking interest rates.
What Is Causing Today's Inflation?
Most economists blame rising prices on COVID-19. Once lockdown measures ended, people were eager to capitalize on their freedoms and spend some of the money they hadn't used while being locked up at home, creating pent-up demand at a time when supply chain bottlenecks were rampant.
The pandemic halted the production of all sorts of goods and services substantially, and companies are now either trying to recoup lost income or struggling to get normal services up and running again. The virus generally had the opposite effect on demand. Government stimulus packages, a lack of spending due to being forced to stay at home, and a desire to enjoy life again after what has been a stressful few years triggered a desire to consume, travel, and buy. In short, it is this concoction of low supply and high demand that is prompting prices to shoot up.
Which Prices Are Rising Highest?
COVID-19 affected pretty much all industries, influencing the price we pay for everything from a gallon of gas to a loaf of bread to a pack of bacon.
Each time the BLS publishes its monthly inflation figures, it accompanies its report with a breakdown of price changes by category. In October, the highest annual price rises were reported for fuel, auto rentals, gas utilities, and used cars and trucks.
Most major news outlets focus on how much prices rose in a year. This can be slightly misleading because the comparison period was during the worst of the COVID-19 pandemic when the public was generally spending much less.
Will Inflation Ease in 2022?
The hottest debate right now, at least in economics, is whether this pace of price increases will continue. Many economists are confident that current inflationary pressures are temporary and won't last too much longer. Others are less positive, arguing that Americans—and people in most of the world's other largest economies—need to adapt and be prepared for more hardship.
One popular theory making the rounds is that current price increases are unusually concentrated and should be ironed out as soon as supply chain bottlenecks and the post-lockdown urges to buy these things subside. In the past, when high inflation numbers were skewed by a handful of goods and services, it didn't take too long for prices to settle back down to normal.
There are also reasons to believe that today's pent-up demand will waver. Savings stockpiles accumulated by households during the pandemic should eventually be exhausted, and government support programs that handed out checks have now mostly expired.
Citi is one of many major investment banks to express confidence that today's inflation is temporary. Earlier in November, in a research note titled "The Changing Inflation Narrative," the bank's strategists predicted that inflation will ease after February 2022 as supply catches up to demand and the Fed makes decent progress delivering on its plan to reduce bond purchases.
Unfortunately, there are also valid reasons to believe that today's strong inflation won't go away anytime soon. The argument that price increases are limited to pandemic-disrupted industries is beginning to waver a bit as other isolated, slower-moving categories such as rent join the trend of becoming more expensive.
The state of the labor market is another concern. Growing job vacancies and difficulty filling positions could likely lead to higher wages. Bigger salaries may trigger more spending among recipients and tempt businesses to recoup these costs by driving up prices.
These observations, coupled with the possibility that the supply chain bottlenecks caused by COVID-19 will take longer than anticipated to sort out, mean we could find ourselves much worse off this time next year.
The Fed's View
Amid all this panic, the people responsible for keeping price growth stable have remained relatively calm. The official word from the Fed has been that this bout of higher inflation is normal and just part and parcel of the economy getting back to normal after a fairly significant, unprecedented downturn.
It shouldn't come as a big surprise that central bankers are issuing tranquil statements. Their job is to transmit calmness, keep markets panic-free, and intervene and change tact only when it is strictly necessary.
So far, the only notable move has been to reduce purchases of Treasuries and mortgage-backed securities (MBS), which have played an important role in keeping interest rates at record low levels. If that play is not sufficient to take the heat out of the economy, the Fed does have other tools at its disposal to raise borrowing costs and discourage spending.
Inflation Winners and Losers
A bit of inflation is necessary to keep the economy growing and is generally considered healthy, provided it is kept under control. If prices continue to spike excessively, it will become a problem and need to be handled accordingly. Rapid inflation can turn really nasty and usually culminates in companies and households reining in spending and slipping into an eventual recession.
Here is a basic summary of some of the biggest winners and losers when it comes to inflation:
|Biggest Winners and Losers of Inflation|
|Debtors with fixed-repayment plans||Savers|
|Owners of assets that should spike in value, such as gold and cryptocurrencies||Borrowers on variable rates|
|Investors in companies with strong pricing power||Investors in longer-term bonds|
What Causes Inflation?
Inflation, the rise of prices for goods and services, can be caused by many things. In general, it is the result of there being more demand than supply or, to put it in other words, when there's too much money chasing too few goods and services.
What Is the Most Common Measure of Inflation?
The Consumer Price Index (CPI) is the most widely reported inflation metric. Produced by the Bureau of Labor Statistics (BLS), it measures the price changes for a basket of commonly purchased goods and services, with the data then used to compare current price trends to those of a prior period. The CPI is one of the tools central banks use to determine interest rates, so it can be useful for investors to keep tabs on it.
What Is the Predicted Inflation Rate for 2022?
That depends on who you ask. Opinions vary on how high prices will rise throughout the course of 2022. Some economists are confident that inflation will dip toward the Fed's target rate of 2%, while others believe it could remain elevated until more aggressive efforts are made to hike record-low interest rates.
What Is the Relationship Between Interest Rates and Inflation?
Central banks effectively use interest rates to control the price of money. When borrowing costs are low, people and businesses tend to spend more. This activity usually leads to inflation, which increasing interest rates enough to incentivize saving can limit.
Federal Reserve. "Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run?" Accessed Dec. 15, 2021.
Bureau of Labor Statistics. "Consumer Price Index – October 2021." Accessed Dec. 15, 2021.
The Economist. "A Handful of Items Are Driving Inflation in America." Accessed Dec. 15, 2021.
Bloomberg. "'Team Transitory' Joined by Citi Strategists in Inflation Debate." Accessed Dec. 15, 2021.
Federal Reserve. "Federal Reserve Issues FOMC Statement." Accessed Dec. 15, 2021.
Bureau of Labor Statistics. "Consumer Price Index Frequently Asked Questions." Accessed Dec. 15, 2021.