US inflation soars to 7%, highest rate since early 1980s

Prices paid by US consumers jumped 7 per cent in December from a year earlier, the highest inflation rate since 1982 and the latest evidence that rising costs for food, rent and other necessities are heightening the financial pressures on the US's households.

Inflation has spiked during the recovery from the pandemic recession as Americans have ramped up spending on goods such as cars, furniture and appliances. Those increased purchases have clogged ports and warehouses and exacerbated supply shortages of semiconductors and other parts. Gas prices have also surged, in part because Americans have driven more in recent months after having cut back on travel and commuting earlier in the pandemic.

Rising prices have wiped out the healthy pay increases that many Americans have been receiving, making it harder for households, especially lower-income families, to afford basic expenses.

On Tuesday, Federal Reserve Chair Jerome Powell told Congress that the central bank was prepared to accelerate the interest rate hikes it plans to begin this year if it deems it necessary to curb high inflation. Fed officials have estimated they will raise their benchmark short-term rate, now pegged near zero, three times this year. Many economists envision as many as four Fed rate hikes in 2022.

Those rate increases would likely increase borrowing costs for home and auto purchases as well as for business loans, potentially slowing the economy. The rate hikes also mark a sharp reversal in policy by Fed policymakers, who as recently as September had been split over whether to raise rates even once this year. The Fed is also rapidly ending its monthly bond purchases, which were intended to lower longer-term interest rates to encourage borrowing and spending.

Yet the Fed’s quick pivot hasn’t quelled questions from many former Fed officials, economists and some senators about whether the Fed has acted too slowly to end its ultra-low-interest rate policies in the face of accelerating inflation - and put the economy at risk as a result.

In his testimony to Congress on Tuesday, Mr Powell said the Fed mistakenly believed that supply chain bottlenecks that have helped drive up the prices of goods wouldn’t last nearly as long as they have. Once the supply chains were unsnarled, he said, prices would come back down.

Yet for now, the supply problems have persisted, and though there are signs that they are loosening in some industries, Mr Powell acknowledged that progress has been limited.

Facing public discontent over the rise in inflation, President Joe Biden has said his administration’s investments in ports, roads, bridges and other infrastructure would help ease inflation by loosening some snarled supply chains.

In the meantime, many restaurants have been passing some of their higher labour and food costs on to their customers in the form of higher prices. So far, many consumers seem willing to pay more.

Gene Lee, CEO of Darden Restaurants, which owns Olive Garden and other brands, told investors recently that this is “the toughest inflationary environment we’ve seen in years.”