US Inflation Jumps To 40-Year High. Here’s Why Consumer Prices Are Not Easing

Consumers witnessed sharp rise in prices of cars, gas, food and furniture in 2021 as the economy was recovering from the pandemic recession

A sign advertises cash paid for used cars in Alhambra, California on January 12, 2022. | AFP

New Delhi: Consumer prices in the US witnessed a solid rise in December as the inflation jumped at its fastest pace in nearly 40 years, a 7 percent rise from a year earlier increasing pressure on President Joe Biden and the Federal Reserve to address one of the biggest economic challenges.

Consumers witnessed a sharp rise in prices of cars, gas, food, and furniture in 2021 amid economic recovering from the pandemic recession, according to the AP report.

The government pumped in money besides keeping the interest at ultra-low to spur demand for goods, while vaccinations gave people the confidence to dine out and travel.

What caused inflationary pressures?

With an increase in spendings, the supply chains remained under pressure due to shortages of workers and raw materials that led to price pressures. On Wednesday, the Labor Department reported said a measure of inflation excluding volatile food and gas prices jumped 5.5 percent in December, also the highest in decades. Overall inflation rose 0.5 percent from November, down from 0.8 percent the previous month.

The pressure may ease with the bottlenecks in supply chains resolving, but most economists say inflation won't fall back to pre-pandemic levels anytime soon.

 “US inflation pressures show no sign of easing,’’ said James Knightley, chief international economist at the financial services company ING.  “It hasn’t been this high since the days of Thatcher and Reagan. We could be close to the peak, but the risk is that inflation stays higher for longer.’’

Is inflation only the US problem?

It is not only that the US is facing inflation problems but in 19 European countries using the euro currency, inflation rose 5 per cent in December compared with a year earlier, the biggest increase on record.

However, the United States hasn’t witnessed anything of this sort since the early 1980s. In those times, Fed Chair Paul Volcker took measures by pushing interest rates to an extreme low, the prime rate for banks’ best customers hit 20 percent in 1980, sending the economy into a deep recession.

But Volcker managed to rein in inflation that had been running at double-digit year-over-year levels for much of 1979-1981.

Inflation could ease as the omicron starts waning and Americans shift more of their spending to services such as travel, eating out, and movie-going. That would reduce the demand for goods and help clear supply chains.