When prices began to rise after the end of the 2020 lockdown, the Biden administration and the Federal Reserve assured Americans that the price spike was “temporary” and everything would return to normal as soon as the economy recovered.
Last year the economy grew by 5.7%, but the rise in prices did not stop. Economists now expect inflation to be a problem through 2022 and 2023.
The latest numbers continue to be alarming; prices rose 7.9% year-on-year, primarily driven by significant increases in gas, food and rental prices.
Even if the supply chain crisis eases, the problem with prices lies in inflation expectations. This means that in every transaction, in every economic decision taken by individuals, there will be the prospect of higher prices.
Workers will want big raises and want them more often. The inflationary “premium” will affect interest rates, which means that mortgages, auto loans and consumer loans will rise.
New York Times:
Even as the Fed prepares to rein in demand, high gas prices linked to the conflict in Ukraine threaten to keep inflation high for a long time to come. They could be a major problem for central bank policy makers if they help reassure consumers that the price hike will continue. If people begin to expect inflation, they can change their behavior so that it becomes more permanent—more willing to accept price increases and demand more increases to keep up.
As far as pricing goes, this is just the latest time that what could go wrong really feels wrong.
So the Times says: “America, Biden is not to blame!” And while other factors are at play, including Vladimir Putin’s desire to gobble up Ukraine, prices were rising long before the Russian army fired a shot.
Housing costs make up the majority of the overall index and change very slowly and often depending on economic conditions, so Fed and White House officials are likely to take note of this change as it could keep inflation high.
Food prices have also risen sharply. Over the past year, food prices have risen 8.6 per cent, the largest annual increase since the period ending April 1981. In February, the cost of groceries increased markedly, including fresh fruit and soft drinks.
But gas was also important. The government said rising prices at gas stations accounted for about a third of the increase in the consumer price index in February.
Connected: Sorry guys, Biden doesn’t have a plan to control inflation.
Inflationary expectations took hold in the 1970s and did not disappear from the economy until Paul Volcker, then Chairman of the Federal Reserve, raised interest rates to an uncomfortable 16.3%. This led to a deep recession.
We are not there yet. But the tools available to the Fed, the White House and Congress are limited at the moment, and aside from raising interest rates to slow the economy, all the Fed can do is ride the wave and hope for the best.