Soaring costs for food, gas and shelter have catapulted inflation to a four-decade high, pressuring consumers and strengthening the case for more rate hikes by the Fed.
But it may be a while before inflation returns to the Fed’s goal of 2%. That’s because of the long lag between policy changes and their effects.
Food prices are not only a top driver of inflation, but they tend to stick around longer than other consumer items like electronics or travel. Unlike these types of purchases, which can be delayed or eliminated when the economy is in trouble, food is a staple of most families’ diets and needs to be bought regularly.
The GAO report details kinks along the supply chain from farm to plate, from higher costs for animal feed and fertilizer boosting commodity prices for farmers, to labor shortages driving costs for packaging and processing such as grinding peanuts into peanut butter. Unlike the past two years when grocers bragged about their ability to pass through cost increases to consumers, this year many appear to be slowing their price hikes.
The United States’ inflation jumped to its highest level in four decades last month, squeezing families as the cost of necessities like food, gas and shelter rise far faster than incomes. Higher prices also make it more difficult for them to afford discretionary items. That has stung lower-income Americans and black and Hispanic households, which spend a larger share of their income on basic needs.
Soaring costs for oil, gasoline and food are largely the result of clogged supply chains that arose from heavy demand, shortages and other factors, including Russia’s invasion of Ukraine. But the broader price gains raise concerns about inflation hitting more parts of the economy, potentially prompting the Federal Reserve to accelerate its planned increase in borrowing rates.
The Fed targets a 2% rate of inflation.
Inflation in the apparel industry can be quite a challenge. From increasing freight rates to skyrocketing international transport costs and unprecedented delivery delays, fashion brands have been facing the issue of passing on inflation to their consumers for quite some time now.
The price hikes were much steeper than expected, elevating so-called core inflation to its highest level in four decades. Core inflation excludes volatile food and energy prices. It is feared that the inflation could hit household purchasing power and prompt them to pull back on spending, hurting economic growth. This will force the Federal Reserve to raise interest rates at a faster pace and send stocks and bonds tumbling. The higher interest rates mean more expensive loans for homeowners, businesses and investors.
Although health care costs, typically a main driver of inflation, remained surprisingly stable during the COVID-19 pandemic, the prices of many services have been soaring as demand picks up and providers recover from losses due to the pandemic. Hospitals, for example, are seeking higher reimbursement rates as their contracts with medical insurers come up for renewal.
Inflation is now a significant concern for employers and other health care purchasers that monitor claims cost and utilization trends. The Labor Department reported that consumer prices jumped 7.5% compared to a year ago, the biggest one-year jump since February 1982. The spike reflected higher prices for everything from used cars and gasoline to bedroom furniture and women’s dresses. But the most significant component of the measure, the Consumer Price Index for all Urban Consumers (CPI-U), is health care services.
The price of housing and food accelerated in February to a 40-year high as bottlenecked supply chains, robust consumer demand and disruptions to global markets from Russia’s war with Ukraine squeezed American families. But the monthly rate of inflation fell short of expectations, and the year-over-year reading remained a troubling 7.5%.
Almost everyone’s largest expense is their mortgage or rent, and if those costs rise rapidly, it can wipe out paycheck raises and even lead to homelessness.
Prices climbed in most categories but surged in those for used cars, bedroom furniture and men’s clothing. It generally takes six months or longer for rental and housing prices to show up in the CPI. That’s a reason why it could take more than a few more rate hikes to tame inflation.a