High inflation and efforts to tame it will define the economy in 2022


WASHINGTON — 2022 was a throwback year for the economy. And not in a good way.

At times it felt like the 1970s or early 80s. Inflation is rampant. The United States and its European allies fought a not-so-cold war with Russia. A grim prospect that makes people angry and scared.

It shouldn’t be like this.

When Federal Reserve policymakers released their forecasts for 2022 a year ago, they looked almost cheerful. After two years of turmoil caused by the pandemic, they foresaw the US economy returning to near-normal.

They expected consumer inflation to reach 2.6% by the end of 2022 compared to 12 months earlier. That would have been just a few ticks above its 2% target for the year, but nothing ominous — and a clear rebound from high inflation in early 2021.

As it turns out, Fed officials underestimated how wage increases, government aid, supply shortages and a pent-up consumer desire to spend would accelerate inflation — and keep it elevated. Most importantly, they failed to anticipate that President Vladimir Putin would send tens of thousands of Russian troops into Ukraine in February this year – an act of shocking aggression that upended world trade in energy and agricultural products and upended oil, natural gas and grain prices drifted up ascending.

“Without that Russian invasion,” said Mark Zandi, chief economist at Moody’s Analytics, “we would be looking at a very different place today.”

Normal would have to wait.

US inflation, an afterthought for decades, rose again with a vengeance this year, reaching levels not seen since the early 1980s. Soaring prices pushed down Americans’ inflation-adjusted wages – despite what many saw as high wage growth – and put consumers in a bad mood. The price spikes forced the Fed to raise interest rates aggressively at the risk of plunging the world’s largest economy into recession.

It wasn’t just the United States. Inflation-ridden countries around the world. The International Monetary Fund expects global inflation to come in at 8.8% this year. That would be the highest value since 1996.

Europe has been particularly hard hit by Putin’s energy shock. Consumer prices are rising at double-digit rates across the continent and in the UK. The purchasing power of consumers was crushed. Many see a European recession in 2023 as almost certain.

Towards the end of the year, however, it looks like relief may be on the way – perhaps tentatively, gradually, but likely still on the way. Inflation figures in Europe and especially in the United States are falling slightly.

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“I think we’ve seen inflation peak; it was probably in the summer,” Zandi said. “We’re going to see much better inflation numbers over the next 12 to 18 months.”

But for the time being, the pain of higher prices is still causing many problems. For US workers, inflation-adjusted hourly wages fell 1.7% in November from a year earlier. It was the 20th consecutive month that this number has fallen year-over-year.

And although headline inflation in the United States eased for the fifth straight month in November, food prices continued to rise. Compared to 12 months earlier, coffee was up 15%. Bread rose 16%, frozen vegetables 18%, canned fruit 21% and eggs with eye glaze 49%.

Businesses large and small are struggling to contain the higher costs and determine if and to what extent they can pass their higher costs on to their customers as higher prices.

Wayne Shumar, who owns Pepperronnies Family Restaurant in Brownsville, Pennsylvania, was so upset by inflation that he posted his receipts for shredded lettuce and tomatoes on his restaurant’s Facebook page. Those prices had doubled in six months.

To save money, Shumar switched from one provider to four. He scans each of their websites for the best deals before placing an order. He also picks up orders himself to avoid dealer fuel surcharges.

“Before spending more time in the dining room,” Shumar said. This is part of a family restaurant. Now I spend more time sitting here looking at a computer screen trying to keep costs down.”

Likewise, Logan’s Roadhouse, a chain of 136 restaurants, is struggling with a 28% price increase for premium roast beef. Those prices are expected to rise another 20% early next year.

“We’re constantly evaluating the cut of meat,” said Josh Kern, CEO of SPB Hospitality, Logan’s parent company. “Are there any recipe changes we can make?”

In another cost-cutting move, Logan’s switched from budget-friendly waffle fries to straight-cut fries. (So ​​far, guests haven’t rebelled.) Butter is up 42% year over year. That’s why Kern’s company is negotiating with butter sellers.

The chain now makes its own macaroni and cheese instead of buying it from a manufacturer.

“We looked at everything in the pantry and were able to make just as good macaroni and cheese,” Kern said.

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Pucker Up Lemonade, which sells beverages at its booth in Compton, Calif., festivals and convenience stores, used to buy its refillable cups from a local vendor for $1 each. Now these mugs cost $2.50. The owner, Karneisha Christian-Stewart, is preparing to buy them in China after calculating she could save $15,000 on a bulk order of 10,000 cups.

“I’ve never imported before,” said Christian-Stewart. “I have to do this because the cost savings for a small business are tremendous.”

John Catsimatidis, who owns New York supermarket chains Gristedes and D’Agostino’s, laments that beef and chicken are about 30% more expensive than they were a year ago. Fish prices go up even more.

The unexpected and unwelcome resurgence of inflation in 2022 wasn’t the only wild turn the economy has taken since early 2020.

First, COVID-19 brought economic activity to a sudden halt as businesses closed or reduced working hours and consumers stayed home for health reasons. In the United States, the economy imploded, shrinking at a record annual rate of more than 30% from April to June 2020. Employers destroyed an incredible 22 million jobs in March and April 2020.

The Fed and other central banks lowered interest rates, and governments provided enormous economic stimulus through spending programs. The result was a stunning rebound. Inundated with government aid, consumers, particularly in the United States, have spent heavily on furniture, appliances, exercise equipment, video games, and other manufactured goods.

The sudden surge in spending caused shortages, delayed deliveries and higher prices. Companies recalled many of the workers they fired in early 2020. Yet they still couldn’t hire fast enough to keep up with customer orders. Many of them raised wages drastically to try to attract and retain workers.

Consumer prices started to rise in spring 2021. Fed Chair Jerome Powell, however, hinted that higher inflation is likely to be “temporary” and would ease once tightening in global supply chains eases.

But the supply shocks did not abate month after month. Sometimes bizarre incidents happened. A surprise freeze in Texas paralyzed petrochemical production. A mammoth container ship got stuck in the Suez Canal, disrupting trade between Asia and Europe. A drought in Taiwan disrupted semiconductor manufacturing. Bird flu has wiped out a record number of poultry.

These factors combine to keep inflation rising steadily well into 2022, to the highs of recent decades.

“Some of these things you can’t make up,” said Daniel Swan, co-head of operations at consulting firm McKinsey & Co. “I don’t remember what normal is anymore.”

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Worst of all, Putin invaded Ukraine and blew up the global energy and food markets.

In response, the Fed has raised interest rates seven times this year, most recently on Wednesday. Their policy rate, which affects much consumer and corporate credit, is now at its highest level since 2007.

The Fed intends to use higher interest rates to slow the economy down enough to bring high prices under control without plunging the economy into recession — a notoriously difficult maneuver.

Supply chains, at least, are starting to unravel their kinks as demand for manufactured goods slacks. Many ports that suffered from backlogs in early 2022 are back to normal. Lower shipping costs alone should reduce global inflation by half a percentage point, estimates Simon MacAdam, senior global economist at Capital Economics.

The official inflation numbers are looking better. The US government reported this week that US consumer prices rose 7.1% year-on-year last month — still high, but a big improvement. The annual price increase peaked at 9.1% in June and has slowed every month since.

Even inflation of 10% last month in the 19 countries that share the euro currency fell from 10.6% in October. The UK government reported that annual inflation fell to a still painful 10.7% last month from 11.1% in October.

Oil prices have plummeted since early November, driving prices down at the pump. According to AAA, a gallon of unleaded gasoline averaged $3.19 on Thursday, down from $5.02 in mid-June.

Nevertheless, the fight against inflation is far from over. Some economists fear labor shortages will persist, particularly in labour-dependent service industries, keeping upward pressure on wages and prices.

Inflation has shifted from goods to services, where it tends to be more persistent. According to the Fed’s favorite measure of inflation – the government’s consumer spending index – services prices rose 0.4% in October and 0.6% in both September and August.

“Inflation has most likely peaked and will be lower in 2023 than in 2022,” said Jason Furman, a Harvard economist who was a top adviser to President Barack Obama. “The problem is that ‘lower’ could mean 3% or 4%, which would still be too high for the Fed. And less is happening partly because the economy is weakening.”

D’Innocenzio reported from New York. AP business writer Dee-Ann Durbin contributed from Detroit.

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