Weekly Brief: Inflation Like Never Before

While the world welcomed 2022 with open arms expecting to start fresh, inflation said no, let's go back to 1982!

What Happened?

2021 saw consumer prices increase by the most in nearly four decades, which lead to the Consumer price index having the largest 12 month gain it has had since 1982. According to the Labor Department of the United States, the consumer price index (CPI), which is the most widely used measure of inflation, rose 7% in December from a year earlier. Generally, policymakers generally believe that approximately 2% is an acceptable inflation rate. This increase in CPI comes amid a shortage of both goods and workers along with unprecedented cash flowing from Congress and the Federal Reserve into the U.S economy.

“We are probably at the peak of inflation increases, but that peak looks months long until fundamental factors such as supply-chain disruptions and the chip shortage get fixed" – Robert Frick, Corporate Economist at the Navy Federal Credit Union

Largest Contributors of Soaring Inflation

The largest contributors towards the high CPI were rising prices for shelter and used vehicles. Shelter, which is one of the eight major components in the Consumer Price Index rose 4.1% in 2021 and used vehicles, which have seen a sharp rise in price due to supply chain constraints, saw an increase of 37.7% in the year 2021.

Significant Effect on Consumers

This rising inflation is eroding consumers' buying power, as real hourly wages have now dropped for nine consecutive months. The high prices in food and energy take up a bigger portion of paychecks, especially hurting lower-income Americans the most. Although wages have been rising at the fastest pace in decades, price increases for essentials have largely eaten up those gains

Future Expectations

Following the news of the CPI ending 2021 with a 7% gain, U.S central bankers and policymakers expectations towards a hike in interest rate by March of 2022 have been bolstered.

With John Williams the president and CEO of the Federal Reserve Bank of New York stating “It is sensible for the Federal Reserve to begin raising interest rates this year as it removes some of the support provided during the pandemic.”

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References

Cox, J. (2022, January 13). Inflation rises 7% over the past year, highest since 1982. CNBC.

Retrieved January 18, 2022, from https://www.cnbc.com/2022/01/12/cpi-december-2021-.html

Pickert, R. (2022, January 12). U.S. Inflation Hits 39-Year High of 7%, Sets Stage for Fed Hike.

Bloomberg. Retrieved January 18, 2022, from https://www.bloomberg.com/tosv2.html?vid=&uuid=aef3d0a1-77c211ec982a59655a4a6f66&url=L25ld3MvYXJ0aWNsZXMvMjAyMi0wMS0xMi9pbmZsYXRpb24taW4tdS1zLXJlZ2lzdGVycy1iaWdnZXN0LWFubnVhbC1nYWluLXNpbmNlLTE5ODI=#:%7E:text=The%20consumer%20price%20index%20climbed,%25%20from%20November%2C%20exceeding%20forecasts.

Reuters. (2022, January 15). Fed officials say rate hikes near as inflation soars. The Economic

Times. Retrieved January 18, 2022, from https://economictimes.indiatimes.com/markets/stocks/news/fed-officials-say-rate-hikes-near-as-inflation-soars/articleshow/88911309.cms