Whether the 2021 price burst teaches households to expect higher inflation going forward is critically important. From the Fed’s perspective, there is a risk that climbing inflation expectations could touch off an upward spiral in wages and prices, as people seek bigger raises to cover their climbing costs.
For the Biden administration, inflation worries threaten to unsettle voters, who are unhappy about paying more to get by.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
“It’s a devastating thing for people who are working class and middle class,” Mr. Biden said at the White House on Tuesday, adding: “It really hurts.”
And every high inflation data point provides fresh ammunition for Republicans, who have blamed the administration’s March 2021 pandemic relief and stimulus package for helping to fuel price increases by giving households money to spend. Inflation fears have already helped to derail a big chunk of Mr. Biden’s economic agenda, with Senator Joe Manchin III, Democrat of West Virginia, saying on Sunday that he could not support the president’s signature $2.2 trillion social safety net, climate and tax proposal.
Part of this year’s inflation surge ties back to demand.
American households amassed roughly $2.5 trillion in savings as lockdowns kept them at home and out of stores — and thanks to government stimulus checks, more generous tax credits and expanded unemployment benefits under the Trump and Biden administrations — helping to fuel the robust spending.
But one of those government programs, the expanded Child Tax Credit, is set to expire, and other key income supplements have already run out. That will leave at least some people and families more vulnerable next year. And while many economists believe rising wages and existing savings will continue to fuel spending, that could be complicated if many people lose jobs as a result of Omicron.
At the same time, a big chunk of the 2021 inflation emanated from supply chain problems.
In 2020, consumers began ordering couches, video game consoles and cars as the pandemic changed their lifestyles and caused them to spend less on restaurant meals and travel. The shift toward goods and away from services overloaded factories, container ships and ports.