Inflation hit its highest point in four decades after prices rose an average of 7%, The New York Times reports.
The Consumer Price Index rose 7% through December and 5.5% when excluding food and fuel.
It is the first time inflation hit 7% since 1982.
Policymakers hoped that inflation would fall as supply chain issues were addressed but instead the spread of the Omicron variant forced some factories to close, contributed to shipping route backlogs, and forced workers to miss shifts.
“Obviously 7 percent is a pretty big sticker shock,” Omar Sharif of the research firm Inflation Insights told the Times, predicting that inflation would only ease back to over 2% at the end of the year. “It’s just a lot of wood to chop to get down to anything approaching the good old days.”
Much of the inflation was driven by the rising costs of food and used cars but December data also shows that rents and the cost of restaurant meals also rose.
“This report underscores that we still have more work to do, with price increases still too high and squeezing family budgets,” President Joe Biden said in a statement.
Chinese lockdowns add to woes:
Recent lockdowns in China to combat the spread of Omicron have contributed to supply chain shortages and could worsen the ongoing chip shortage, which has caused spikes in prices on cars and computers.
“If they stick to their zero-case doctrine, a global supply chain disaster is on the horizon,” warned Tinglong Dai, a professor of operations management at Johns Hopkins University Carey Business School.
Gas prices moderated last month but food prices and restaurant meals surged by more than 6%.
High inflation threatens to be the dominant issue for President Joe Biden and his party heading into the 2022 midterms. Republicans have accused Democrats of contributing to inflation with stimulus checks and other pandemic aid.
“Inflation has become a dominant political issue, but one that is largely out of the administration’s control,” Alec Phillips, an economist at Goldman Sachs, wrote in a recent research report.
Fed floats higher rates:
Federal Reserve Chairman Jerome Powell on Tuesday called high inflation a “severe threat” to economic recovery and said the Fed is prepared to raise interest rates.
“If we have to raise interest rates more over time, we will,” he said, adding that the economy no longer needs emergency stimulus.
The Fed cut short-term interest rates to around zero during the pandemic and began buying bonds to lower long-term rates. Powell said the Fed would begin to shrink its $8.8 trillion portfolio of bonds and other assets later this year.
“It is really time for us to begin to move away from those emergency pandemic settings to a more normal level,” Powell said. “It’s a long road to normal from where we are.”