Inflation ended 2021 on a high note, bad news for Biden’s White House and economic policymakers, as rapid price increases erode consumer confidence and cast a shadow of uncertainty over the economy’s future.
The consumer price index is likely up 7 percent in the year through December, and 5.4 percent after excluding volatile prices like food and fuel, economists estimate in a Bloomberg survey. The last time the major inflation index eclipsed 7 percent was in 1982.
What you need to know about inflation in the US
Policymakers have waited months for inflation to subside in hopes that supply chains could catch up with soaring consumer demand. Instead, ongoing waves of coronavirus infections have shut down factories and shipping routes struggle to clear the long backlogs as consumers continue to buy goods from abroad at a rapid pace. What happens next may be the biggest economic policy question of 2022.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation costs, and toys.
Here’s what to watch when new CPI data is released on Wednesday at 8:30 AM:
Second-hand cars. Used car and truck prices have been a major factor in recent inflation, and this is likely to have continued into December. Wholesale car prices continued to rise in December, according to a closely monitored index. Cars are expensive as manufacturers struggle to source parts, especially computer chips imported from Asia. Recent lockdowns in China designed to contain the coronavirus could exacerbate the shortage, boosting demand for used cars. When it comes to rising auto prices, “it’s not over,” said Jim O’Sullivan, chief US macro strategist at TD Securities.
Groceries and gasoline. Wall Street economists and analysts tend to focus on a price measurement that ignores food and fuel costs, because those prices fluctuate a lot from month to month. But they are very important for households. While gas prices moderated somewhat in December, food became increasingly expensive. The fact that high prices are taking a bite out of household budgets seems to be one of the reasons consumer confidence is faltering – and gas and food tend to be the most notable costs for shoppers.
Rising rents. While inflationary pressures at the beginning of the pandemic were focused entirely on goods, it has recently crept into the services sector – and, more importantly, rents. Housing costs make up about a third of the consumer price index, so the fact that landlords charge more is a big factor in overall inflation.
Supply chain nods. The Federal Reserve is withdrawing support from the economy, which should make borrowing money to buy a car or house more expensive and slow demand, putting pressure on inflation. But the supply side is more of a wild card: it’s unclear when companies can produce and transport enough goods and services to eliminate backlogs and shortfalls. There are early signs that snoring in shipping lanes and depleted supplies may be declining, but other signals suggest a return to normalcy will take time.
“You always see a few snowflakes, but it hasn’t turned into a storm yet,” Fed chairman Jerome H. Powell said of signs that kinks in the supply chain are resolving themselves, during Senate testimony on Tuesday.
The likely takeaway. Almost everyone expects inflation to moderate somewhat as the economy approaches 2022. Even with Wednesday’s new data, however, it will remain difficult to guess how fast — and how fast.