Moneybox

Why the Latest Inflation Numbers Are So Grim

Prices are marked for clear plexiglass at the Shell Lumber and Hardware home improvement store on February 10, 2022 in Miami, Florida. The Labor Department announced that consumer prices jumped 7.5% last month compared with 12 months earlier, the steepest year-over-year increase since February 1982.  (Photo by Joe Raedle/Getty Images)
Consumer prices: Going up! Joe Raedle/Getty Images

Joe Biden’s presidency is on the rocks in large part thanks to inflation. The rising cost of essentials like groceries and gas, as well as major family purchases like cars, has weighed on his approval rating as voters have lost faith in the White House’s handling of the economy. The Federal Reserve has become increasingly alarmed about soaring prices as well, and is now planning a series of interest rate hikes to tame them that some worry could inadvertently tip the country into a recession. Meanwhile, Sen. Joe Manchin has blocked much of the administration’s spending agenda partly on the grounds that it could “add fuel to the fire.”

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As the months have worn on, delivering one brutal batch of economic data after another, Democrats have held out hope that inflation would eventually tail off on its own. Surely those tangled supply chains, which have pushed consumer prices higher, would straighten themselves out soon. But January’s numbers, which the Bureau of Labor Statistics released on Thursday, actually suggest the opposite might be happening—inflation appears to be spreading more broadly across the economy.

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For much of last year, inflation was disproportionately driven by just a handful of spending categories, particularly cars, gasoline, and meat. Many economists and journalists (myself included) actually saw that as a reason to feel optimistic, since all three of those products were getting expensive thanks to unique supply problems created by the pandemic and recovery. Those snags would eventually go away—and once they did, those categories’ prices would drop, or at least plateau.

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But meat, trucks, and gas aren’t really the only story of inflation anymore. In January, the Consumer Price Index, or CPI, rose 0.6 percent—which works out to a roughly 8 percent annualized rate. Core CPI, which subtracts volatile food and energy prices, also rose by 0.6 percent. It has been increasing at about that pace since October.

Core CPI
Core CPI. Federal Reserve Bank of St. Louis
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So what’s dragging inflation higher? Used car prices, which have skyrocketed in the past year, are still a factor. So are rising housing expenses, thanks to landlords who have started raising rents again. But the ludicrous costs of buying a pre-owned F-150 can’t explain what happened in January. If you subtract used cars, energy, food, and shelter, the CPI actually grew 0.7 percent last month, up from 0.4 percent in both November and December.

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Rather, the answer seems to be that inflation just sort of made everything a bit more expensive in January. Clothes, tools, prescription drugs, you name it. You couldn’t chalk it up to a handful of industries. And it wasn’t just the cost of stuff, either. The price of services, including medical care, suddenly shot up in January, too, which might be a sign that rising wages are beginning to push up prices as well. (In 2021, services excluding housing got 3 percent more expensive, a little high by recent standards, but not unheard of. Last year, the inflation story was really much more about physical items.)

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Inflation data can be a bit erratic in the short term, and it’s always dangerous to draw heavy conclusions based on a single month’s number. But the fact that core inflation doesn’t seem to be slowing down, and that inflation appeared to broaden its reach through the economy in January, has contributed to a sense of anxiety that, no, these problems just aren’t going to get better on their own, at least any time son. As inflation becomes more widespread, the concern is that it will become stickier and harder to stop. For instance, a lot of corporate executives have recently been telling investors that they’ve used inflation as an excuse to increase their own prices and margins. Progressives have frequently cited this as an example of how the real problem is profiteering by big business; but you could just as easily interpret it as an example of how, after a while, the psychology of inflation can become self-perpetuating. It’s still possible that inflation will subside on its own. Maybe inflation will ease naturally. But it’s hard to look at a report like January’s and feel like this is still a problem that will fix itself.

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