After yet another ugly inflation report, the United States has its highest inflation rate since 1982, an eye-popping 6.8%. It was an increase that surpassed anything even the most pessimistic forecasters expected.
Inflation is up almost a whole percentage point in a single month and is three times the Fed target of 2%. It may climb higher still before it starts to come under control.
Inflation has become impossible to ignore. Working people are struggling to meet the cost of basics like food and housing because of skyrocketing prices. In November, food prices were up 6.1% from the year before, with meat, poultry fish and eggs up 12.8%, cereals and bakery products were up 4.6% and non-alcoholic beverages up 5.3%. Energy prices increased 33%. Used trucks and vehicles went up 31.4%.
All these items are basic necessities. Working Americans have had trouble this year affording basic needs amid soaring inflation.
Is it any wonder why the ordinary working American is anxious when they go to the grocery store or gas station? Basic necessities have become unaffordable for many middle- and low-income families whose salaries have not kept up with inflation. Ignoring these numbers is like going to the Grand Canyon and keeping your eyes shut.
The Federal Reserve, after having been caught flat-footed, is now struggling to get ahead of inflation. After nearly a year of insisting that inflation is transitory, the Fed finally acknowledged otherwise. It will cut back its stimulus program more quickly than planned, ending asset purchases by March and raising interest rates as much as 75 basis points by the end of 2022.
That word “transitory” has been put to pasture as the Fed gradually tightens monetary policy to put the economy on a smooth glide path back to a growth and inflation equilibrium, and the promised land. Good luck with that.
The Fed’s hawkish pivot comes as the economy faces the fastest inflation since the 1980s and a tight labor market. The Fed made a historic mistake that they now have to fix by slamming on the brakes without sending the economy into recession. Prices rise when goods become scarce or the money supply expands rapidly.
For sure, pandemic-induced supply chain disruptions have caused scarcity, but the Fed increased the money supply more than 40 percent in the past two years, creating excess demand that has contributed to inflation. Say what you want about inflation, and everybody does, today’s version is an unusual combination of both the demand and supply side.
Stopping inflation is a slow and painful experience for ordinary working-class Americans. Inflation may become self-perpetuating through price and wage-setting behavior. American workers will demand higher wages to compensate for inflation, and firms will raise prices, creating a vicious cycle. It eats away at consumer purchasing power and has historically required crushing interest rates to bring it under control.
Anyone whose pay is not rising by at least 7% will, in effect, feel like their pay has been cut. Inflation is now America’s public enemy number one.
It should be clear as gin that the pay hikes the country is seeing for workers traditionally at the lower end of the pay spectrum are long overdue after decades of stagnation. But higher wages are only meaningful if working Americans can afford more as a result. Next year’s price surges threaten to cancel out bigger paychecks as working people will be paying more for less.
