Consumer Prices Jumped at Fastest Pace Since 1982

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Inflation closed out 2021 on a high note, bad news for the Biden White House and for economic policymakers as rapid price gains erode consumer confidence and cast a shadow of uncertainty over the economy’s future.

The Consumer Price Index climbed by 7 percent in the year through December, and by 5.5 percent after stripping out volatile prices such as food and fuel. The last time the main inflation index eclipsed 7 percent was 1982.

Policymakers have spent months waiting for inflation to fade, hoping supply chain problems might ease, allowing companies to catch up with booming consumer demand. Instead, continued waves of virus have locked down factories, and shipping routes have struggled to work through extended backlogs as consumers continue to buy good from overseas at a rapid clip. What will happen next might be the biggest economic policy question of 2022.

Wednesday’s fresh data showed that the cost of used cars, shelter and food are all increasing quickly.

Prices for used cars and trucks have been a big driver of recent inflation. Auto manufacturers have been struggling to get their hands on parts — particularly computer chips imported from Asia — delaying production of new vehicles and pushing up demand for a finite supply of used ones.

Recent lockdowns in China meant to contain the coronavirus could exacerbate the shortage. When it comes to vehicle prices, “it’s not over yet,” said Jim O’Sullivan, chief U.S. macro strategist at T.D. Securities, said before the report.

As prices continue to surge, economic policymakers are poised to react. Federal Reserve officials have indicated that they expect to raise interest rates several times this year as they try to slow down demand and the economy, in a bid to make sure that the pandemic-era burst in prices does not become a permanent feature of the economic landscape.

Jerome H. Powell, the Fed chair, emphasized on Tuesday, when he spoke before the Senate Banking Committee at a renomination hearing, that the Fed’s moves to reduce policy help will adjust to the economic conditions.

“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” he said at the hearing.

Investors and economists increasingly expect four interest rate increases this year.

The future trajectory of inflation is uncertain, as price pressures spread across many categories.

While gas prices moderated somewhat in December, food has been growing steadily more expensive. Food at home climbed in price in December, while food away from home grew even more rapidly last month — and full-service restaurant meals picked up by 6.6 percent over the year.

Economists and Wall Street analysts tend to closely focus on a measure of prices that strips out food and fuel costs, because they jump around a lot from month to month, but those expenses matter a lot to households.

The fact that high prices are taking a bite out of household budgets seems to be one of the reasons that consumer confidence has faltered; gas and food tend to be among the most salient costs for shoppers.