Just a few years ago, inflation seemed like an issue the US and many other major western economies had outgrown. “Is inflation dead?” Businessweek asked in 2019, beneath an image of an ailing dinosaur. And then came Covid-19.
Supply chain issues, sickness, death and the war in Ukraine upended global trade. Propped up by government handouts and savings, consumers bounced back from the pandemic shutdowns only to find a short supply of everything from used cars to housing was triggering a cost of living crisis unseen in a generation. US inflation this year reached a 40-year high.
Now there are some signs that the price increases will slow in the coming year. But the overall picture is complicated. Here’s some of what we know about inflation this year and where it is heading.
How high did inflation get this year?
Inflation hit highs this year unseen since the 1970s. Inflation started at 7.5% in January and eventually climbed up to 9.1% in June, when gas prices were hitting $5 (£4) a gallon in some states. The inflation rate for gas prices alone was 60% at a time, largely because of repercussions from Russia’s invasion of Ukraine.
Rising oil prices and lingering Covid-19 supply chain issues kept food prices elevated. A shortage on semiconductor chips continued into the first half of 2022, keeping new and used car prices high.
Even when inflation started coming down from its peak in June, core inflation, which is the price of all goods and services except for the volatile energy and food markets, went up in September to 6.6%, showing just how widespread inflation was.
The last few months have finally seen inflation coming down, at rates lower than economists had expected. In November, inflation was at 7.1%, the lowest rate this year.
Did economists expect inflation to get this high?
Not exactly. Many economists, including those at the Federal Reserve, believed that inflation would be “transitory”, or temporary, and would ease in 2022 as supply chain issues got resolved and people slowed their spending. It was the message that both Joe Biden and Fed chair Jerome Powell were touting at the end of 2021.
Instead, the supply chain issues continued, particularly because the Omicron variant emerged and proved difficult to control. Then Russia invaded Ukraine at the end of February, causing massive disruption to global supply chains, particularly in the energy market. And even amid continued rising prices, US consumers continued to spend, showing that pent-up pandemic demand was larger than expected.
What has the Federal Reserve done to address inflation?
The main tool the Federal Reserve has to address inflation is to adjust interest rates, which is meant to temper spending by making borrowing money more expensive.
Starting in March, the Fed started hiking up interest rates at a pretty aggressive rate. In December, the Fed raised interest rates for the seventh time this year, bringing interest rates from 4.25% to 4.5%.
Economists say the raised interest rates have only played a small role so far in getting the inflation rate down. So far, the raised interest rates have been mostly felt in the housing market, since rates directly impact mortgages. Home sales have been falling since February.
“It mostly takes time. It certainly played a little bit of a role, but the bulk of the Fed’s tightening I don’t think is going to be felt until next year, or even to some extent 2024,” said Michael Pugliese, an economist at Wells Fargo.
Will inflation continue to come down in 2023?
Fed chair Jerome Powell is taking a pessimistic view on inflation in the coming year.
“We’ve continually expected to make faster progress on inflation than we have, ultimately,” Powell said on 14 December, after the Fed’s latest interest rate hike. The Fed has indicated it is aiming to keep raising rates until it hits somewhere around 5% to 5.5%, signaling Fed officials’ concern that inflation will prove to be stubborn.
But compared to where things…
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