The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else.
Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Ronald Reagan was president in the early 1980s -- and in the lifetimes of most Americans.
Higher prices helped deliver a banner year for U.S. business, which is posting its fattest profit margins since the 1950s. But for Joe Biden’s administration and the Federal Reserve -– who didn’t see it coming -- the sudden return of inflation, largely dormant for decades before 2021, is looking increasingly traumatic.
It’s likely to drive some big changes in the coming year, as the Fed pivots toward raising interest rates and the president heads into midterm elections with slumping approval ratings.
How did it happen? Essentially, the pandemic made it harder for the world to produce stuff and move it around. The government shored up incomes in the crisis like never before, so households remained eager to spend. And a combination of lockdowns and Covid caution meant their purchasing power was focused on consumer goods instead of services.
That’s why there are long lines of cargo ships stretching off the coast of Los Angeles waiting to dock, while used-car dealers keep hiking prices and a global commodities rally leaves Americans paying more at grocery stores and gas pumps.
Hotspots to Everywhere
A year ago, economists were forecasting 2% inflation for 2021. The pandemic had depressed prices early on, and everyone expected a rebound. But Fed Chair Jerome Powell’s prediction that it would be temporary, and not very large, was widely shared.
The first hint that inflation was about to really accelerate came in February, said Omair Sharif, president of research company Inflation Insights LLC. “Something was bubbling under the surface -- and more specifically in autos.”
A pandemic-driven shortage of semiconductors was holding back production of new cars, so buyers -- including rental firms, who’d sold off their fleets earlier in the crisis -- were bidding up the prices of old ones.
Americans had the cash. In contrast to the last recession, when fiscal austerity held back the recovery, Congress kept the stimulus flowing. On top of the $2.2 trillion rescue package in the spring of 2020, when the pandemic arrived, came another $900 billion in December 2020, then $1.9 trillion more in March after Biden took office.