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14-07-2022, 09:11 AM
By PAUL WISEMAN
yesterday
......
For months, Powell and some others characterized high inflation as merely a “transitory” phenomenon while the economy rebounded from the pandemic recession faster than anyone had anticipated. No longer. Now, most economists expect inflation to remain painfully elevated well after this year, with demand outstripping supplies in numerous areas of the economy.
So the Fed has radically changed course by imposing a succession of large rate hikes. The central bank is making a high-risk bet that it can slow the economy enough to rein in inflation without weakening it so much as to trigger a recession.
......
WHAT’S CAUSED THE SPIKE IN INFLATION?
Good news — mostly. When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in 2020′s April-June quarter.
Everyone braced for more misery. Companies cut investment and postponed restocking. A severe recession ensued.
But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by vast infusions of government aid and emergency intervention by the Fed, which slashed rates among other things. By spring of last year, the rollout of vaccines had emboldened consumers to return to restaurants, bars, shops, airports and entertainment venues.
Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings or buy enough supplies to meet customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains seized up.
With demand up and supplies down, costs jumped. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to pile up savings during the pandemic.
Critics blamed, in part, President Joe Biden’s US$1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own. Many others assigned a greater blame to supply shortages. And some argued that the Fed kept rates near zero far too long, lending fuel to runaway spending and inflated prices in stocks, homes and other assets.
......
HOW LONG WILL IT LAST?
No one knows for sure. Elevated consumer price inflation could endure as long as companies struggle to keep up with consumers’ demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and a healthy average of 457,000 a month so far this year — means that Americans as a whole can afford to keep spending.
The Fed foresees inflation staying above its 2% annual target into 2024. But relief from higher prices might be coming. Oil prices have been tumbling on fears of an economic downturn. Jammed-up supply chains are showing some signs of improvement, at least in industries like transportation. Commodity prices have begun to fall. Pay increases have slowed. And surveys show that Americans’ expectations for inflation over the long run have eased — a trend that often points to more moderate price increases over time.
What’s more, the Fed’s pivot toward an aggressively anti-inflationary policy could eventually reduce consumer demand. Inflation itself is eroding purchasing power and might force some consumers to shave spending.
For other questions, please read: https://apnews.com/article/why-is-us-inf...7a82f17ab1
yesterday
......
For months, Powell and some others characterized high inflation as merely a “transitory” phenomenon while the economy rebounded from the pandemic recession faster than anyone had anticipated. No longer. Now, most economists expect inflation to remain painfully elevated well after this year, with demand outstripping supplies in numerous areas of the economy.
So the Fed has radically changed course by imposing a succession of large rate hikes. The central bank is making a high-risk bet that it can slow the economy enough to rein in inflation without weakening it so much as to trigger a recession.
......
WHAT’S CAUSED THE SPIKE IN INFLATION?
Good news — mostly. When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in 2020′s April-June quarter.
Everyone braced for more misery. Companies cut investment and postponed restocking. A severe recession ensued.
But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by vast infusions of government aid and emergency intervention by the Fed, which slashed rates among other things. By spring of last year, the rollout of vaccines had emboldened consumers to return to restaurants, bars, shops, airports and entertainment venues.
Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings or buy enough supplies to meet customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains seized up.
With demand up and supplies down, costs jumped. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to pile up savings during the pandemic.
Critics blamed, in part, President Joe Biden’s US$1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own. Many others assigned a greater blame to supply shortages. And some argued that the Fed kept rates near zero far too long, lending fuel to runaway spending and inflated prices in stocks, homes and other assets.
......
HOW LONG WILL IT LAST?
No one knows for sure. Elevated consumer price inflation could endure as long as companies struggle to keep up with consumers’ demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and a healthy average of 457,000 a month so far this year — means that Americans as a whole can afford to keep spending.
The Fed foresees inflation staying above its 2% annual target into 2024. But relief from higher prices might be coming. Oil prices have been tumbling on fears of an economic downturn. Jammed-up supply chains are showing some signs of improvement, at least in industries like transportation. Commodity prices have begun to fall. Pay increases have slowed. And surveys show that Americans’ expectations for inflation over the long run have eased — a trend that often points to more moderate price increases over time.
What’s more, the Fed’s pivot toward an aggressively anti-inflationary policy could eventually reduce consumer demand. Inflation itself is eroding purchasing power and might force some consumers to shave spending.
For other questions, please read: https://apnews.com/article/why-is-us-inf...7a82f17ab1
