U.S. inflation hit a three-decade high in October—rising at a 6.2% annual rate—as pandemic-related supply shortages and continued strength in consumer demand continued to push up prices.
The Labor Department said the consumer-price index, which measures what consumers pay for goods and services, increased at the fastest annual pace since 1990. Inflation also topped 5% for the fifth straight month. RECESSION’05’10’15’201990’952000-2.502.55.07.5%
The so-called core price index, which excludes the often-volatile categories of food and energy, in October climbed 4.6% from a year earlier, higher than September’s 4% rise and the largest increase since 1991.
On a monthly basis, the CPI increased a seasonally adjusted 0.9% in October from the prior month, a sharp acceleration from September’s 0.4% rise, and the same as June’s 0.9% pace.
Price increases were broad-based in October, with higher costs for new and used autos, energy, furniture, rent and medical care, the Labor Department said. Prices fell for airline fares and alcohol.
Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, thinks the U.S. is entering a six-month period of unusually high inflation.
“I do think we’re moving into a new phase where inflation is broader and where things are going to get a little more intense,” she said. “Part of that reflects that [supply-chain] bottlenecks are not resolved going into the holiday season, when a lot of purchases get made, and that the economy is doing really well, so you have strong demand.”
Ms. Rosner-Warburton sees a shift under way in which a wider range of factors will push up inflation, as opposed to the previous months’ increases, which were driven disproportionately by skyrocketing vehicle prices and the reopening of services after Covid-19 vaccines became available. “Part of [this] still seems likely to be transitory, but maybe not all of it,” she said.
Federal Reserve officials are closely watching inflation measures to gauge whether the recent jump in prices will be temporary or lasting. One such factor is consumer expectations of future inflation, which can prove self-fulfilling as households are more likely to demand higher wages and accept higher prices in anticipation of higher future price growth.
Consumers’ median inflation expectation for three years from now stayed at 4.2% in October, the same as in September, according to a survey by the New York Fed. That level is the highest since the survey began in 2013.
Unusually high demand—boosted by a long stretch of government stimulus and an improving job market—is a crucial factor driving higher inflation.
Consumer spending increased at an annual rate of 1.6% in the third quarter, a sharp slowdown from a 12% increase in the prior quarter. However, much of that deceleration was due to scarcity of new cars and other durable goods. Consumer spending on services last quarter climbed at the brisk annual rate of 7.9%.
Covid-19 continues to be a wild-card factor. The outbreak of the Delta variant put downward pressure at the end of the summer on prices for travel, recreation and other services that involve close interaction. Spending on services has bounced back in recent weeks as coronavirus infections fell, which could put further upward pressure on prices.
Companies are struggling to get materials and are delaying orders as elevated demand for goods due to pandemic spending habits has collided with transportation bottlenecks, production disruptions from Covid-19 and labor shortages. The most prominent example is a shortage of semiconductors that has hamstrung auto production. Limited supply of new autos has driven up prices for both new and used vehicles.
‘Things are going to get worse before they get better.’ — Kathy Bostjancic, chief U.S. financial economist at Oxford Economics
The chip shortage, which has also affected other industries, has worsened because of shutdowns of factories and ports in Asia in response to Covid-19 outbreaks.
Supply disruptions go far beyond the semiconductor shortage, creating scarcity for a range of materials affecting companies throughout the chain of production. A separate shortage of available workers is also affecting inflation and the overall economy, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“The bigger picture is we’re likely to see inflation climb higher,” she said. “Things are going to get worse before they get better.”
Many companies are passing on higher costs to consumers. In October some 53% of small businesses raised prices, on net—a level last seen in the early 1980s—according to the National Federation of Independent Business, a trade association.