US Inflation: Experts Believe It Is Here To Stay

US Inflation: Experts Believe It Is Here To Stay

American consumers are coping with the highest inflation rate in nearly four decades. Now they have to shell out more dollars from their pockets for everything from rent to the price of used cars to gasoline to food, which is mounting nationwide. And it may get worse before things start to fall in place. 

In a recent analyst note to clients, Goldman Sachs economists raised a red flag, saying that pandemic-induced disruptions in the global supply chain, which has led to crowding in ports and warehouses nationwide, could remain for a longer period than expected as meeting up with the intensifying demand is becoming challenging; strongly suggesting that inflation metrics will remain “quite high for much of next year.”

“It is now clear that this process will take longer than initially expected, and the inflation overshoot will likely get worse before it gets better,” the note read.

United States Inflation Rate

Inflation in the United States, according to the Federal Reserve’s preferred gauge– personal consumption expenditures price index, has climbed to the highest level since February 1982. In November, US personal consumption expenditures rose 5.7%, significantly above the Fed’s preferred target of 2%. 

Further, the same tale of rising prices is recited by another measure–the Consumer Price Index (CPI)– which grew 0.8% during November, settling at 6.8% year-over-year, the fastest rate reported in nearly four decades. Besides, core CPI, excluding food and energy prices, increased by 4.9% over last year, the highest increase in around three decades.

Federal Reserve And Inflation

The higher-than-expected inflation report will likely support the Federal Reserve’s decision to expedite the withdrawal of its monetary support for the US economy in December, which might put added pressure on the central bank to harden policy further in 2022 by raising interest rates. 

Despite the fact, policymakers voted for the rates to remain near zero, as they have already been since March 2020. As per the report by Fox Business, new economic projections show that every Fed official expects a minimum of one rate hike next year, contrary to their previous belief that interest rate hikes would not be necessary until at least 2023.

Officials now expect the rates to stand at 0.9% at the end of 2022, 1.6% at 2023-end and 2.1% at 2024-end.

FOMC Meeting

In the most recently concluded policy-setting meeting, the Federal Open Market Committee (FOMC), said that in response to rising inflation, they have decided to reduce the central bank’s asset purchase program.

“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” said the bank’s policy making committee in the statement.

“In light of inflation developments and the further improvement in the labour market,” the committee decided to decelerate its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities, beginning with the mid of January purchase schedule, as per the report by Xinhua news agency.

Fed Chairman Jerome Powell said that he sees a fall in consumer prices next year as supply chain congestion clears up, but he also cautioned against an increased risk of persistently high prices. 

He said the Fed’s decision to expedite its withdrawal of assistance was on the back of growing wages, half a million new jobs, and a 0.9 percent monthly rise in consumer prices.

“There’s a real risk now,” Powell said at a press conference to explain the Fed’s decision. “I believe that inflation may be more persistent…the risk of higher inflation becoming entrenched has increased.”

The next FOMC meeting will happen on Jan. 25 and 26.

On the other hand, the economists at Goldman noted, “We do not think that aggregate demand is on an unsustainable trajectory or that inflation expectations have become unanchored, and the overshoot should therefore ultimately prove transitory.”

The Goldman Sachs economists gauge inflation to get moderate somewhat to 2.3 percent by the end of 2022, then declining to 2.1 percent by the end of 2023.