Economy

US inflation reaches a four-decade high

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking

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There’s a variety of reasons why inflation is so high at the moment, but the one event we can all point to is the pandemic.

Between a worker shortage and stimulus checks – getting stuff made and shipped is difficult right now.

For example, Vietnam, which has become an apparel manufacturing hub over the last few years, is dealing with a worker shortage after many workers left to go back to their hometowns to recover from the emotional toll from being in the city during the height of the COVID-19 outbreaks. This means that these manufacturing firms are limited on how much they can make.

Within the United States, though, there’s also a worker shortage. This means that there are fewer people to, for example, unload ships at cargo ports and fewer truck drivers able to take that cargo to where it needs to go.

With there being a worker shortage, there’s also been an increase in wages to try and attract talent, which has just added to the costs for businesses, adding to the inflationary pressures.

This is all the while the US central bank has been increasing liquidity in the economy since mid-March last year to try and keep the economy moving while lockdowns and social distancing measures were put in place.

During a Senate Banking committee meeting on Tuesday, while Jerome Powell, the US central bank chief, was questioned about his second term in the position, he said, “If we have to raise interest rates more over time, we will. We will use our tools to get inflation back.”

This is after Powell said that if inflation gets “entrenched into the economy and people’s thinking then, inevitably, that will lead to much tighter monetary policy from us, and it could lead to a recession.”

He also said that both inflation and full employment are important goals for the Fed, but right now, inflation is the focus.

“To get the kind of very strong labor market we want, with high participation, it is going to take a long expansion. To get a long expansion we are going to need price stability. And so in a way, high inflation is a severe threat to the achievement of maximum employment.”

Powell also told lawmakers Tuesday that he expected the Fed to begin shrinking its US$8.77 trillion balance sheet later this year.

US consumer prices surged in December 2021, with the annual increase in inflation the greatest in nearly four decades at 7%.

The biggest contributers to the inflation rate were price increases in housing, used cars and trucks, with 0.4% and 3.5% increases in prices compared with November, respectively. Food prices also continued to increase. But this 0.5% jump in prices is not as high as increases seen in previous months.

For many experts, this sets the stage for a Fed interest rate hike as soon as March.

”The US economy appears ready for interest rate lift-off to start in March,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.

In prepared remarks for a Senate hearing on Thursday on her nomination to become vice chair of the US central bank, Federal Reserve Governor Lael Brainard commented on the situation. “Inflation is too high, and working people around the country are concerned about how far their paychecks will go,” Brainard said. “Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone. This is our most important task.”

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