Inflation in the United States soared by 7% in 2021, the highest ever recorded in the last 40 years. The US Labor Department noted that the Consumer Price Index, a broad metric used to track nationwide inflation, surged by 7% before the end of December last year. Core inflation, which does not include volatile goods like food and gas, also jumped by 5.5% compared to 2020.
The Labor Department noted that much of this surge was driven by used cars and home prices. Data shows that the price for used cars and trucks shot up by nearly 37% in 2020. At the moment, the average cost for a used vehicle is around USD 29,000. As for shelter costs, the Labor Department noted that prices jumped 4.1% while energy costs were up by 29% in 2020.
However, the cost of energy dropped sharply in December, reflecting the global decline in gas and oil prices. This is the highest inflation on record since 1982. In fact, there is a whole generation of young American consumers who have never witnessed something like this before. Experts also warn that we are still not at peak inflation levels.
It’s even argued that we could be months away from the ultimate peak, especially when you consider that underlying fundamentals that have driven the Consumer Price Index to these new levels have not abated. Most analysts argue that the supply chain disruptions caused by COVID will need time to fully resolve. There is also the chip shortage which many experts believe won’t start easing until the end of 2022.
For the best part of 2021, even though there were clear signs that inflation was rising, policymakers called it “transitory.” In essence, the argument was that once the supply chain crunch eases, then the cost of consumer goods would also drop. However, this has not happened. It is becoming clear that it may take longer for the supply chain crunch to ease than earlier expected. The shortage of semiconductors has also been a huge factor.
These chips, most of which are produced in Asia, are used in a wide range of consumer goods including cars. Due to the shortage, many carmakers have had to cut production forecasts for new cars, something that has in turn pushed demand for used vehicles to a whole new level. Nonetheless, the US Federal Reserve is expected to take more action to deal with this runaway inflation.
Fed Chair Jerome Powell announced that the Federal Reserve will raise interest rates at least three times in 2022 to address the issue. Powel also added that increased inflation could pose a huge threat towards restoring the US job market. With these measures, the Fed is hoping to see inflation drop to nearly 2.6% by the end of the year.
There is also optimism that the US unemployment rate will drop with it. However, there are still growing fears that a new wave of Omicron infections in the US could hamper economic and job growth in the near term.