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September Consumer Price Index: Inflation Rises

  • October 13, 2021

The reality that American households are paying more for dinner, fuel and housing is a major political problem for President Biden. Voters could punish Democrats at the polls as wage gains, while decent, fail to fully cover higher costs.

It also poses an economic dilemma for the Fed, which must decide how quickly to scale back its economic support at a time when inflation is high but the nation is millions of jobs shy of prepandemic levels. The Fed is tasked with maintaining both relatively stable prices and full employment.

Fed officials have been buying $120 billion in bonds each month and holding interest rates near zero to keep borrowing cheap and money flowing. The economy has progressed enough this year that they could begin slowing their buying program in November or December, minutes from their last meeting released on Wednesday suggested.

But officials would prefer to leave their policy rate at rock bottom for some time, giving displaced workers time to trickle back. Pernicious inflation could complicate that plan, forcing them to raise rates earlier and more quickly than they would prefer to keep prices under control. Rate increases dissuade borrowing and cut into demand for cars and houses, eventually slowing price increases and the broader economy.

The potential conflict between the central bank’s two goals could set the stage for a tense 2022.

“We’re already seeing officials beginning to stake out arguments on liftoff,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “It’s mostly an inflation story, and an inflation expectations story.”

The staying power of rapid price increases has come as a shock to many economists and officials.

Inflation jumped early in 2021 as prices for airfares, restaurant meals and apparel recovered after slumping as the economy locked down during the depths of the pandemic. That was expected. But more recently, prices have continued to climb as supply shortages mean businesses cannot keep up with fast-rising demand. Factory shutdowns, clogged shipping routes and labor shortages at ports and along trucking lines have combined to make goods difficult to produce and transport.

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