EXPLAINER: Mixed US inflation signs. Where are prices going?
Consumers struggling with skyrocketing prices for food, gas, autos and rent got a tantalizing hint of relief last month, when prices didn’t budge at all from June after 25 straight months of increases.
Consumers struggling with skyrocketing prices for food, gas, autos and rent got a tantalizing hint of relief last month, when prices didn’t budge at all from June after 25 straight months of increases. With gas prices continuing to fall, inflation is probably slowing further this month.
So has the worst bout of inflation in four decades possibly peaked? Economists say it’s too soon to know for sure. Even if it has peaked, it will likely remain high well into next year.
Since inflation ignited early last year, it has temporarily slowed before, only to re-accelerate in later months. When that happened last fall, Federal Reserve Chair Jerome Powell was forced to jettison his description of higher prices as being merely “transitory” and to acknowledge that high inflation was proving to be chronic.
On Wednesday, the government reported that consumer inflation jumped 8.5% in July from 12 months earlier. That was an unexpectedly sharp slowdown from the 9.1% year-over-year inflation rate in June, which was the largest in four decades. But it was still quite high.
So-called core prices, which exclude the volatile food and energy categories to produce a better picture of underlying inflation, also rose more slowly: They increased 0.3% from June to July, less than the 0.7% rise from May to June. Over the past 12 months, core prices rose 5.9%, the same as in June.
WHAT’S CAUSED THE SPIKE IN INFLATION?
Good news — mostly. When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breath taking 22 million jobs.
Everyone braced for more misery. Companies cut investment and postponed restocking. A severe recession ensued.
But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fuelled by vast infusions of government aid and emergency intervention by the Fed, which slashed short-term interest rates.
Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings or buy enough supplies to meet customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains seized up.
With demand up and supplies down, costs jumped. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to pile up savings during the pandemic.
Critics blamed, in part, President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own. Many others assigned a greater blame to supply shortages. And some argued that the Fed kept rates near zero far too long, lending fuel to runaway spending and inflated prices in stocks, homes and other assets.