Even before Russia’s war further spurred price increases, robust consumer spending, steady pay raises and chronic supply shortages had sent U.S. consumer inflation to its highest level in four decades. In addition, housing costs, which make up about a third of the consumer price index, have escalated, a trend that seems unlikely to reverse anytime soon.
Economists point out that as the economy has emerged from the depths of the pandemic, consumers have been gradually broadening their spending beyond goods to include more services. A result is that high inflation, which at first had reflected mainly a shortage of goods — from cars and furniture to electronics and sports equipment — has been emerging in services, too, like travel, health care and entertainment.
The expected fast pace of the Fed’s rate increases will make loans sharply more expensive for consumers and businesses. Mortgage rates, in particular, though not directly influenced by the Fed, have rocketed higher in recent weeks, making home buying more expensive. Many economists say they worry that the Fed has waited too long to begin raising rates and might end up acting so aggressively as to trigger a recession.
For now, the economy as a whole remains solid, with unemployment near 50-year lows and job openings near record highs. Still, rocketing inflation, with its impact on Americans’ daily lives, is posing a political threat to President Joe Biden and his Democratic allies as they seek to keep control of Congress in November’s midterm elections.
The American public’s expectation for inflation over the next 12 months has reached its highest point — 6.6 percent — in a survey the Federal Reserve Bank of New York has conducted since 2013.
Once public expectations for inflation rise, they can be self-fulfilling: Workers typically demand higher pay to offset their expectations for price increases, and businesses, in turn, raise prices to cover their higher labor costs. This can set off a wage-price spiral, something the nation last endured in the late 1960s and 1970s.
Economists generally express doubt that even the sharp rate hikes that are expected from the Fed will manage to reduce inflation to anywhere near the central bank’s 2 percent annual target by the end of this year. Luke Tilley, chief economist at Wilmington Trust, said he expects year-over-year consumer inflation to still be 4.5 percent …….