What Economists Are Saying About Inflation
Consumer prices soared by the most in four decades in January, with inflation across the economy showing few signs of peaking even after months of increases. The Consumer Price Index's 7.5% annual surge at the start of 2022 was the biggest leap since 1982 and topped already elevated expectations for a 7.3% rise. On a month-over-month basis, the CPI unexpectedly posted a 0.6% increase for a back-to-back month, whereas economists had been looking for a deceleration. Core inflation, which strips out volatile food and energy prices, also exceeded estimates, showing a 6.0% year-over-year jump in January. The report served as one of the clearest affirmations that inflation — described as recently as November by the Federal Reserve as "transitory" — has become a persistent feature of the economic recovery. And for many economists, the further jump in prices in January serves as additional fuel to the argument that the Fed must hasten to pivot away from accommodative monetary policies and tighten financial conditions to help bring down elevated prices. The details of the CPI report showed few areas where consumers could find refuge from rising prices. Jumps in prices for food, energy and shelter comprised some of the largest contributors to the headline rise in inflation in January. The widespread pressure across goods likely reflects ongoing supply chain constraints which have not yet shown signs of material improvement. In services, rents stayed hot, with OER (owners' equivalent rent of residences) up 0.42% month-over-month and rent of primary residence accelerating to a 0.54% clip — the strongest monthly increase since October 1992. Tight labor markets and strengthening wage growth are likely underpinning the rent trajectory, which could continue to heat up in coming months. The good news in this report — really — is that new vehicle prices were unchanged, after eight straight monthly increases of more than 1% per month. This is a significant development. Rising inventory, on the back of increasing chip supply, is both boosting sales and capping prices. Vehicles account for 10% of the core CPI, so sustained declines would be a real drag on the overall core inflation rate, which rose to 6.0% in January from 5.5% in December. The peak likely will be in March, close to 6.5%, but it should then fall rapidly. The Fed has signaled it will stop adding assets to its portfolio in March and then begin raising interest rates, increasing borrowing costs and tamping down on consumption to help stem the rise in prices. It’s not just consumer goods going up, so don’t bother waiting for the pandemic to go away and allow more workers to return to their jobs and lessen those supply bottlenecks. Inflation is raging out of control due to too strong consumer demand and the only thing the Federal Reserve can do is rein in consumer spending.