Year-over-year inflation may have reached a new four-decade high in January, with American consumers spending freely and many supply chains remaining clogged.
The reasons that have pushed up costs since last spring have essentially remained unchanged: Wages are increasing at a rate not seen in at least 20 years. Hundreds of workers at the nation’s largest ports, Los Angeles and Long Beach, were off ill last month, adding to the strain on ports and warehouses. As a result, many items and parts are in limited supply.
According to reports, the expiry of stimulus cheques and other government handouts has had little effect on Americans’ desire to purchase.
According to data source FactSet, economists predict that when the Labor Department releases January’s inflation estimates on Thursday, consumer prices will have risen 7.3 percent from a year earlier. This would be the largest year-over-year growth since February 1982, and it would be up from 7.1 percent in December.
Other data, on the other hand, may indicate that price rises have slowed. Consumer inflation may have fallen for the third month in a row when evaluated from December to January. Prices gained 0.4 percent from December to January, according to analysts, compared to 0.6 percent from November to December and 0.7 percent from October to November.
Nonetheless, the fastest year-over-year inflation in 40 years has wiped out the advantage of higher wages for the majority of Americans, leaving them unable to afford food, petrol, rent, child care, and other basics. As the midterm elections approach later this year, inflation has emerged as the most significant economic risk factor, posing a severe danger to President Joe Biden and congressional Democrats.
Since the epidemic ravaged the economy in March 2020, the Federal Reserve and its head, Jerome Powell, have shifted drastically away from ultra-low interest rate policies. Powell hinted two weeks ago that the central bank will likely raise its short-term interest rate multiple times this year, with the first boost almost surely coming in March. At least five rate hikes are expected in 2022, according to investors.
Higher rates will boost borrowing costs across the board, from mortgages and credit cards to auto loans and business credit, over time. The Fed faces the danger of triggering another recession by slowly limiting lending for households and companies.
Many significant firms have stated on investor conference calls that supply shortages will last until at least the second part of this year. Companies ranging from Chipotle to Levi’s have also stated that after raising prices in 2021, they will likely do it again this year.
Chipotle has raised menu pricing by 10% to compensate for rising meat and transportation expenses, as well as higher employee compensation. If inflation continues to rise, the restaurant chain warned it may consider raising prices again.
“We keep expecting beef prices to rise and then fall, but that hasn’t occurred yet,” said John Hartung, the company’s chief financial officer.
However, executives at Chipotle, Starbucks, and other consumer-facing firms have indicated that their consumers haven’t been fazed by the increased costs so far.
Levi Strauss & Co. hiked prices by nearly 7% above 2019 levels last year, and aims to do so again this year due to growing costs, especially labor. Despite this, the San Francisco-based firm has raised its sales projections for 2022.
“Every indicator we’re receiving right now is favorable,” CEO Chip Bergh told analysts.
Many small firms are boosting prices as well, despite the fact that they usually have smaller profit margins than bigger corporations and have struggled to keep up with their substantial pay rises. According to a monthly poll conducted by the National Federation for Independent Business, 61 percent of small businesses raised their pricing in January, the highest percentage since 1974 and up from only 15% before the epidemic.
“More small company owners began the new year by boosting prices in an attempt to pass on rising inventory, supplies, and labor expenses,” according to Bill Dunkelberg, the NFIB’s senior economist. “Owners are boosting salaries at record-high rates to attract competent personnel to their unfilled jobs, in addition to inflation concerns.”
As corporations strive to offset the expenses of the increased wages, they may be forced to raise prices in the future.
Sharp spikes in the cost of petrol, food, automobiles, and furnishings have thrown many Americans’ finances into disarray in the last year. Economists at the University of Pennsylvania’s Wharton Business School predicted in December that to acquire the same quantity of goods and services in 2020, the average household would have to pay $3,500 more.