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Inflation gauge rose 5.8% in 2021, most in 39 years

Inflation

Stubbornly high inflation caused by the Biden administration, has hammered household budgets, wiped out last year’s healthy wage gains and posed a severe political challenge to Democrats who have supported it. Federal Reserve Chair Jerome Powell said that the Fed will move to shrink its huge $8.9 trillion of bond holdings soon after it starts raising rates, another step that will likely tighten credit, slow spending, and potentially weaken the economy. As reported by the AP:

The inflation report Friday from the Commerce Department also said that consumer spending fell 0.6% in December

WASHINGTON (AP) — A measure of prices that is closely tracked by the Federal Reserve rose 5.8% last year, the sharpest increase since 1982, as brisk consumer spending collided with snarled supply chains to raise the costs of food, furniture, appliances, and other goods.

High gas prices are posted at a full service gas station in Beverly Hills, Calif., Nov. 7, 2021. Oil prices, which have a big impact on the price of gasoline and home heating oils, have been on an up-and-down ride since the fall. And while oil prices are usually pretty volatile, the constantly change nature of the coronavirus pandemic has made predicting the ups and downs even harder. (AP Photo/Damian Dovarganes)

The report Friday from the Commerce Department also said that consumer spending fell 0.6% in December. A wave of omicron cases discouraged many Americans from traveling, eating out or visiting theaters and other entertainment venues. At the same time, incomes rose 0.3% last month, providing fuel for future spending.

Stubbornly high inflation has hammered household budgets, wiped out last year’s healthy wage gains and posed a severe political challenge to President Joe Biden and Democrats in Congress. It also led the Federal Reserve to signal Wednesday that it plans to raise interest rates multiple times this year beginning in March to try to get accelerating prices under control.

Chair Jerome Powell also made clear that the Fed will move to shrink its huge $8.9 trillion of bond holdings soon after it starts raising rates, another step that will likely tighten credit, slow spending, and potentially weaken the economy.

inflation
FILE – Federal Reserve Board Chair Jerome Powell testifies before Senate Banking, Housing, and Urban Affairs hearing to examine the Semiannual Monetary Policy Report to Congress, July 15, 2021, on Capitol Hill in Washington. Powell said Tuesday, Aug. 17, 2021 that the U.S. economy has been permanently changed by the COVID pandemic and it is important that the central bank adapt to those changes. “We’re not simply going back to the economy that we had before the pandemic,” Powell said at a Fed virtual town hall for educators and students. (AP Photo/Jose Luis Magana, file)

Speaking at a news conference Wednesday, Powell acknowledged that inflation has gotten “slightly worse” in the past month. He cautioned that higher prices “have now spread to a broader range of goods and services,” after initially affecting sectors of the economy, like factory-made products for homes, that were most disrupted by the pandemic.

Powell also said the Fed is increasingly focused on the question of whether rising wages are acting as a primary driver of inflation, by forcing companies to charge more to cover their higher labor costs. Such a “wage-price spiral,” which the United States hasn’t experienced since the 1970s, can make inflation difficult to cool.

The inflation figure that the government reported Friday is its personal consumption expenditures index. Though the consumer price index is a better-known barometer, the Fed tends to track the PCE in setting its interest rate policies. The PCE index tracks actual purchases consumers make each month, while the CPI follows a fixed market basket of goods.

pandemic
American Express, Visa and Master card cards on display in Richmond, Va., Thursday, July 1, 2021. U.S. consumer borrowing surged by $35.3 billion in May as Americans, bolstered by a reopening economy and rising job levels, went back to using credit in a big way. Borrowing on credit cards and for auto and student loans showed solid gains in May, the Federal Reserve reported Thursday, July 8, 2021. (AP Photo/Steve Helber, file)

Earlier this month, the government said the CPI jumped 7% last year, also the fastest pace in nearly four decades.

Prices have jumped in the past year as Americans have spent freely, helped by large stimulus checks in the spring and higher pay. Spending on autos, electronics and other goods jumped 12% in 2021, the government reported Wednesday, the biggest increase since 1946.

At the same time, bottlenecked supply chains and shortages of components, notably semiconductors, have left many retailers and auto dealers with fewer cars and other goods to sell. Powell has blamed mainly ongoing “supply and demand imbalances” for driving inflation.

On Thursday, McDonald’s said that while sales last year grew at a healthy pace, higher costs for food and paper products and the need to raise pay to attract and keep workers eroded profits even after it had raised prices 6% last year.

Unemployment
FILE – A hiring sign is displayed in Downers Grove, Ill., on June 24, 2021. The number of Americans applying for unemployment benefits fell to a fresh pandemic low last week, Thursday, Nov. 4, another sign the job market is healing after last year’s coronavirus recession. Jobless claims dropped by 14,000 to 269,000 last week. (AP Photo/Nam Y. Huh, File)

Likewise, Procter & Gamble said last week that it plans to raise prices for detergents like Tide, Gain, and Downy and for personal care products. The company anticipates price increases for chemicals and other commodities this year.

Higher prices may be weighing on some Americans’ willingness to spend. Still, last month’s drop in consumer spending is likely to be temporary. Americans are already showing signs of heading back out to restaurants and movie theaters as the huge jump in omicron infections has started to decline.

JPMorgan Chase says spending on its credit cards for hotels, travel, and entertainment venues has rebounded this month, after falling in December. Spending has risen more in states where COVID-19 cases have come down the most.

By CHRISTOPHER RUGABER Economics Writer

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