October 2021 CPI: Inflation Rose at Fastest Rate Since 1990
The Consumer Price Index rose 6.2 percent in October from a year ago, its fastest increase since 1990. That is bad news for President Biden and the central bank.
Inflation spiked in October, sinking Washington’s hopes that price gains would slow down.
Nov. 10, 2021Updated 10:25 a.m. ET
Year-over-year change in the Consumer Price Index
By The New York Times
Consumer inflation surged in October as fuel costs picked up, supply chains remained under pressure and rents moved higher — bad news for economic policymakers at the Federal Reserve and for the Biden White House, which had been emphasizing a recent slowdown in price gains.
Overall prices have climbed by 6.2 percent over the past 12 months, the fastest pace since 1990, and inflation accelerated on a monthly basis after cooling in recent months.
Inflation picked up to 0.9 percent last month from September, a Labor Department report showed, faster than the prior month’s increase of 0.4 percent and well above economists’ expectations. So-called core price gains, which strip out products like food and fuel, also climbed more quickly.
Those heady data scupper a White House talking point. Officials had regularly pointed out that while price gains were faster than usual, at least they were slowing down from rapid summertime readings.
But instead of cooling off toward the end of 2022 as many policymakers had expected, inflation rates remain far faster than the 2 percent annual gains the Federal Reserve aims for on average over time. While the Fed sets its goal using a separate measure of inflation — the Personal Consumption Expenditures index — that too has picked up sharply this year. The C.P.I. reports come out faster, and help to feed into the Fed’s favored gauge, so they are closely watched by economists and Wall Street investors.
On Wednesday, President Biden acknowledged that prices were continuing to rise, saying in a statement that “reversing this trend is a top priority for me.”
Administration and Fed officials alike have maintained that rapid inflation will eventually fade. But they have had to revise how quickly that might happen: Supply chains remain badly snarled, and demand for goods is holding up and helping to fuel higher prices. As wages begin to rise in many sectors amid labor shortages, there are reasons to expect that some businesses might charge their customers more to cover climbing worker costs. October’s data did nothing to alleviate that worry.
“It’s a big number,” Michelle Meyer, head of U.S. economics at Bank of America, said of the October data. “What’s striking is the broadening of the inflationary pressures.”
Many factors pushed inflation higher last month. Used and new car shortages have sent prices skyrocketing, supply chain issues have made furniture costlier, labor shortages are raising some service-industry price tags, and rents are rising after a weak 2020. In the headline data, food and fuel prices have picked up sharply.
The reality that inflation is broadening — and moving to slow-moving categories like rent rather than staying confined to pandemic-disrupted ones like imported electronics and airplane tickets — is likely a source of particular concern for Fed policymakers, because it increases the risk that price pressures could last. That’s especially true as labor proves scarce and participation in the job market shows little sign of picking up, fueling wage gains, Ms. Meyer said.
“I think that they see this report, and they’re probably very concerned,” she said, explaining that she and her colleagues expect inflation to remain elevated through the end of next year. “It’s obviously getting uncomfortable for the Fed.”
Fed officials had been expecting price gains to fade, and have avoided overreacting to an inflation surge driven by supply chain problems, worried that doing so would hurt the economy unnecessarily. If the current trends persist, they will likely come under growing pressure to hasten their plans to pull back economic support, including raising interest rates sooner and more quickly.
While Mr. Biden has been arguing that his infrastructure plans could help to alleviate supply chain pressures, and that the administration is working to negotiate with oil suppliers to lower fuel costs, the Fed has primary responsibility for maintaining stable prices.
“I want to reemphasize my commitment to the independence of the Federal Reserve to monitor inflation, and take steps necessary to combat it,” Mr. Biden said in his statement following Wednesday’s data.
Americans are paying more for furniture, food and pretty much everything else they’re buying these days.Credit…Jutharat Pinyodoonyachet for The New York Times
For policymakers and investors alike, is difficult to predict when price jumps might moderate. Many are intertwined with the reopening of businesses from state and local lockdowns meant to contain the coronavirus; the economy has never gone through such a widespread shutdown and restart before.
But many policymakers have become wary that inflation that is too quick for comfort might linger. Consumers have been increasing their expectations for future price gains. Households expecting to face climbing grocery, department store and gas bills might demand pay raises — setting off an upward cycle in which wages and prices push one another ever higher.
Key measures of price expectations haven’t climbed into the danger zone yet, officials including Richard H. Clarida, the Fed’s vice chair, have said.
And there are still reasons to believe that today’s price pop will fade. Households are sitting on huge savings stockpiles amassed during the pandemic, but should theoretically spend those down now that government support programs like expanded unemployment insurance have fully or mostly lapsed.
If demand moderates, it could open the door for a return to normal, as supply chains catch up. To the extent that suppliers have responded to this moment by ramping up their productive capacity, some prices might even fall.
Even so, that could take time.
Supply chain experts have been warning that some of the shortages driving up costs might get worse before they get better, especially headed into the busy holiday shopping season, which could further clog backed-up ports and understaffed trucking routes. The longer that prices for washing machines and electronics continue to soar, the more risk there is that consumers will begin to plan for higher prices.
Used car prices may not peak until April 2022, said Jonathan Smoke, chief economist at Cox Automotive, which produces a closely watched index that tracks wholesale vehicle costs. After that, they’re unlikely to actually fall; they will just increase less quickly than their current breakneck pace.
Understand the Supply Chain Crisis
Now, ports are struggling to keep up. In North America and Europe, where containers are arriving, the heavy influx of ships is overwhelming ports. With warehouses full, containers are piling up. The chaos in global shipping is likely to persist as a result of the massive traffic jam.
Dealer inventories are down 74 percent compared to what is normal at this time of year, he said, and that will take time to turn around.
“That’s a tremendous decline, that essentially requires capacity to be overproducing,” he said. “It can’t grow fast enough to deal with the historically low inventory levels.”
At #1 Cochran Subaru Butler County, a car dealership in Western Pennsylvania, general sales manager Jim Adams is offering a $500 bonus to lease customers who return vehicles early, and purchasing cars that people bring in for repairs. He is asked a few times a day when things might normalize.
“Until the manufacturers can get back up to speed, used car prices will continue to grow,” Mr. Adams said in an email.
Across industries, the timing and extent of the eventual return to balance is a wild card. In the meantime, Republicans are pointing fingers at Mr. Biden and Democrats, saying they are to blame for the run-up in prices because they handed checks to households and enacted other pandemic-tied policies. They have labeled the moment “Bidenflation.”
The White House has tried to emphasize that higher prices are coming at a time when the country is staging a rapid economic rebound from a once-in-a-century disaster. And Mr. Biden has said that his new policies, including an infrastructure bill that cleared Congress last week, will over time expand capacity and help to cool inflation.
The problem extends beyond politics. At the Fed, some officials are already warning that the central bank may need to stop its economy-stoking bond buying — which it just this month announced a plan to slow — and begin to raise interest rates sooner than planned. Doing that could cool down prices by tempering demand, but would also weaken the job market at a moment when millions remain out of work compared with prepandemic employment levels.
Reacting too swiftly could snuff out job opportunities just as people start trying to return to the labor market. That would be a heavy price to pay, and a needless one if the inflation jump fades on its own.
“We don’t think it’s time yet to raise interest rates,” Jerome H. Powell, the Fed chair, said at a recent news conference. “There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation.”
But officials also recognize the costs of high prices, especially in things that households must consume every day, regardless of their means.
“I really feel for all of the families who are out there purchasing goods and services,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said during a webcast on Tuesday. But she said the question for the Fed is whether those increases last.
“Does it persist past, or beyond, when Covid is really disrupting things?” she said.
The October data is not going to make the policymakers’ job of navigating the moment easier.
“I expect lots of eyeballs were bulging out of their sockets when they saw the number come in,” Seema Shah, chief strategist at Principal Global Investors, wrote in a note reacting to the data. “Inflation is clearly getting worse before it gets better, while the significant rise in shelter prices is adding to concerning evidence of a broadening in inflation pressures.”