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Consumer prices jumped last month, a problem for Washington and Wall Street.

  • October 13, 2021

In recognition of how persistent the price increases are proving, the Social Security Administration said on Wednesday that benefits will increase 5.9 percent in 2022, the biggest boost in 40 years. The increase, known as a cost of living adjustment, is tied to rising inflation.

The reality that American households are paying more for dinner, fuel and housing is a major political problem for the Biden administration and an economic dilemma for the Fed. Voters could punish Democrats at the polls as wage gains, while decent, fail to fully cover higher costs. And as prices move up in key areas like rent, chances are rising that fast price gains could last for some time.

“You have the sticky, important and cyclical piece of inflation surprising to the upside,” said Laura Rosner-Warburton, an economist at MacroPolicy Perspectives. “It is certainly a very significant development.”

Inflation jumped early in 2021 as prices for airfares, restaurant meals and apparel recovered after slumping as the economy locked down during the depths of the pandemic. That was expected. But more recently, prices have continued to climb as supply shortages mean businesses cannot keep up with fast-rising demand. Factory shutdowns, clogged shipping routes and labor shortages at ports and along trucking lines have combined to make goods difficult to produce and transport.

The snarls show no obvious signs of easing, and although Fed officials still think inflation will fade, they are increasingly concerned that supply disruptions could last long enough to prompt consumers and businesses to expect higher prices. If people believe that their lifestyles will cost more, they may demand higher compensation — and as employers lift pay, they may charge more for their goods to cover the costs, setting off an upward spiral.

Wages are already heading up, though typically too little to fully offset the amount of inflation that has occurred this year. There are notable exceptions to that, including in leisure and hospitality jobs, where pay has accelerated faster than prices.

The Fed aims for 2 percent inflation on average over time, which it defines using a different but related index, the Personal Consumption Expenditures measure. That gauge is released at more of a delay, and has also jumped this year.

Central bankers have said that they are willing to look past surging prices because the gains are expected to prove transitory, and they expect long-run trends that had kept inflation low for years to come to dominate over time. But they have acknowledged that rapid price gains have lasted longer than they had expected, and have expressed wariness.

“I believe, as do most of my colleagues, that the risks to inflation are to the upside, and I continue to be attuned and attentive to underlying inflation trends,” Richard H. Clarida, the central bank’s vice chair, said in a speech on Tuesday.

Fed officials are already planning to soon dial back their $120 billion in monthly asset purchases, a process often called tapering and the first step away from crisis-era policy. The Fed’s more traditional tool, the federal funds rate, remains set to near zero and is expected to stay there for some time.

The fact that the Fed is poised to begin tapering could mean that it will be more nimble if it does have to raise rates to control inflation next year.

Central bankers have signaled that they would use the Fed’s policies to control inflation if it proves persistent — but they would prefer to leave borrowing costs at low levels until the job market is more fully healed. Those potentially conflicting goals could set the stage for a tense 2022.

Some officials may begin to push to raise rates earlier thanks to the price pop.

“We’re already seeing officials beginning to stake out arguments on liftoff,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “It’s mostly an inflation story, and an inflation expectations story.”

Wall Street is watching every fresh inflation data point closely, because higher rates from the Fed could dent growth and stock prices. Plus, climbing costs can cut into corporate profits, denting earning prospects.

And the White House is under pressure to come up with whatever fixes it can. Later on Wednesday, President Biden is expected to address the supply-chain problems — which are weighing on his approval ratings as they push prices higher.

Credit…Kendrick Brinson for The New York Times

The administration is scrambling to alleviate pressures, to the extent that it is able to do so. Ahead of Mr. Biden’s speech, administration officials said they had brokered a deal to move the Port of Los Angeles toward 24/7 operations, joining Long Beach, which is already operating around the clock. UPS, Walmart and FedEx are also expected to announce that they are moving to work more off-peak hours.

White House officials and many Wall Street data watchers tend to emphasize a “core” index of inflation, which strips out volatile food and fuel prices. Core inflation climbed at 4 percent in the year through last month, but the monthly gain did look less pronounced, at 0.2 percent.

Some economists welcomed that moderation as good news, along with the cooling in key prices, like airfares, that had popped earlier in the economic reopening. Others emphasized that once supply chain kinks were worked out, prices could drop on products like couches, bikes and refrigerators, providing a counterweight to rising housing expenses.

“I don’t think there’s any reason to panic,” said Omair Sharif, founder of Inflation Insights.

Mr. Sharif said he expected consumer price inflation to moderate, coming in at 2.75 percent to 3 percent on a headline basis by next July, and for core inflation to cool down even more. Given that, he thinks policymakers at the Fed have room to be patient.

“They can wait this out for longer,” he said.

Ana Swanson and Ben Casselman contributed reporting.

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