Accelerating Inflation Spreads Through the Economy

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The burden of high inflation weighs on Fed policy, with wide-ranging effects on cost of living, wages and social-benefit programs.

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On monthly basis, CPI Seasonally adjusted up 0.4% in September Since August, even faster than in August, which is up 0.3%.

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The pull of high inflation – which many economists now anticipate – is weighing on the Federal Reserve’s policy decisions and is starting to have a massive impact on overall cost of living, wages and social benefit programs. The Social Security Administration said Wednesday that higher inflation would trigger a 5.9% increase for Social Security benefits that senior citizens and other Americans receive, the biggest increase in nearly 40 years. It would also increase Social Security taxes for higher-paid workers. Last week, the Labor Department said employers raised wages in September by 4.6% from a year earlier, a pickup from previous months.

In minutes released Wednesday, the Fed said last month officials worried that disrupted supply chains were increasing the risk of more persistent inflation as they planned to end its bond-buying stimulus program by the middle of next year. Was.

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Abnormally high demand is a key factor driving high inflation. Spending jumped at an 11.9% pace in the second quarter as more people received COVID-19 vaccinations, businesses reopened and trillions of dollars in federal aid flowed through the economy. Consumer spending continued to rise in August.

Salaries are also increasing due to shortage of employees, which is putting pressure on companies to increase prices. Economists say the sharp jump in restaurant prices over the past few months is a sign of this shift from wage to higher prices.

Rising energy prices—driven by a global recovery in demand, constrained supply and geopolitical forces—could also keep prices up. According to the US Energy Information Administration, US consumers are now paying an average of $3.29 a gallon for gasoline, the highest level in seven years. Faster energy bills for businesses can add to the pressure to raise prices.

“Housing costs, lower inventories and rising energy prices will keep inflation going for a longer period of time,” said James Knightley, ING’s chief international economist, who now expects consumer inflation to remain above 5% during the first quarter of 2022. He added. Said inflation may prompt the Federal Reserve to act “earlier and faster” to change monetary policy to reduce inflation.

The Labor Department said prices for groceries, gasoline and heating fuel rose in September along with the cost of new vehicles, rent and furniture. Prices fell for used autos, airline fares and apparel.

Companies are grappling with scarce materials due to a combination of poor supply chains, disrupted production and increased demand due to the pandemic. The combination of truck-driver shortages and continued consumer demand for goods has led to the closure of ports, delaying the delivery of goods and increasing shipping prices.

Adam Levine, owner of a building materials delivery business based in Columbus, Ohio, began noticing a rise in prices in the spring. “And then it was just one after another,” he said. His company, Hamilton Parker, sells masonry, tile, fireplaces and other construction products to consumers and other businesses, and soon raised its prices to keep up.

Shipping delays are adding to the uncertainty around prices. Delivery time is extended for all products of the company. Garage doors are coming in 15 weeks when they used to take just two, Mr Levine said. With such delays in shipments, suppliers have started raising prices on already negotiated orders.

“The risk for us as a result of price changes is that projects may be canceled, affecting future sales. Customer relationships may be challenged based on unexpected price changes, and it is on my team to update these price updates. There is significant stress on communicating,” he said.

Many companies are already planning to pass the high labor and material costs on to consumers. In September, some 46% of small businesses said they planned to raise prices over the next three months, according to the National Federation of Independent Business, a trade association, the highest since monthly records began in 1986.

“It looks like some of these supply-chain and inventory challenges are going to be with us for a while—at least for the rest of this year,” said Omair Sharif, founder of Inflation Insights LLC.

One example is the shortage of semiconductors that has curtailed auto production, driving up the prices of new and used vehicles. According to Kelley Blue Book, as new car sales slowed for the fifth month in a row, the average price of a new vehicle in September rose by nearly $4,900 compared to a year earlier. However, despite data from the private sector indicating a rebound in used car prices, the Labor Department reported a slight decline last month.

Robert Rosner, senior US economist at Morgan Stanley, said the fall in the prices of used cars and airline fares hid the underlying inflationary trend.

“The real story in the inflation data was the upside in more cyclical and frequent components such as rents,” he said. “This tells us that there is an important source of support that is likely to keep inflation data stable in the coming months and more.”

Rent is a major category as it makes up about one-third of the CPI index and influences the future trajectory of inflation. Tenant rent rose 0.5% in August to September, the fastest monthly increase since 2001. The so-called owners’ par rent, which estimates how much homeowners will pay each month to rent out their home, rose by 0.4%, the highest since 2006.

Fed officials are closely watching a number of inflation measures to determine whether the recent surge in prices will prove to be temporary or permanent. One such factor is consumer expectations of future inflation, which may prove to be self-sustaining as households are more likely to demand higher wages and accept higher prices when they expect higher price increases in the future. Consumers’ average inflation expectation for three years rose to 4.2% in September, up from 4% a month earlier, according to a New York Fed survey. The September readings were the highest since the survey began in 2013. According to the Atlanta Fed, business expectations for inflation held steady at 3.1% in early October, a year from now since the survey began in 2011.

Alternative inflation measures also suggest that inflation from rising prices is coming from a broader set of products and services, driven by pandemic-driven forces that economists expect to be temporary. The Cleveland Fed’s 16% trimmed-mean CPI, which captures price changes in the middle of the index, rose 3.6% in September from the same month a year ago, up from 3.2% in July and well above the 2% average between 2012. and 2019.

Gwyn Guilford at [email protected]


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