PCE Index Hit Highest Level in November Since 1982

The Fed’s preferred inflation gauge climbed at the fastest pace in nearly four decades, as Omicron clouded the outlook for 2022.

The Fed’s preferred inflation gauge climbed at the fastest pace in nearly four decades, as Omicron clouded the outlook for 2022.

As the year draws to a close, inflation remains stubbornly high and the Omicron variant of the coronavirus poses looming uncertainty about what might come next, keeping the pressure on the Federal Reserve and President Biden to do more to tame rising prices.

The Personal Consumption Expenditures price index, which the Fed officially targets when it aims for 2 percent annual inflation on average over time, climbed 5.7 percent in November from a year earlier — the fastest pace since 1982 — the Commerce Department said on Thursday.

It was yet another sign that high prices, which many economists once hoped would fade quickly, are instead persisting, burdening consumers and worrying government officials.

The data came as a rising number of Omicron infections makes the inflation and economic outlook hazier. On one hand, the virus could slow the growth of the economy and of prices if it prompts furloughs at a time when the government is no longer stepping in to fill the void, costing households and hurting demand. On the other hand, surging global caseloads could push prices up as they close factories and keep cars, furniture, toys and other goods in short supply.

Even before the new variant surfaced, consumer spending failed to eke out a gain last month after adjusting for inflation, the Thursday data showed. Economists said the lack of growth might simply reflect that people shopped for the holidays earlier this year to guard against shortages — spending surged in October. But the blip underscores how challenging it is to understand incoming data about consumption, growth and prices in a pandemic-stricken economy.

The picture will become all the more complicated heading into 2022, with many government relief programs either expired or about to be. Theaters, restaurants and live shows are already closing their doors to contain the spread, leaving workers temporarily out of jobs and consumers without services to spend their money on.

“I do think that demand is going to be affected by this,” said Aneta Markowska, the chief financial economist at Jefferies. “Every time a Broadway show closes, a restaurant closes, that’s a furlough.”

The virus is making the trajectory for economic growth less certain. Most forecasters expect the economy to expand rapidly next year but at a slower place than in 2021: Fed officials last week projected that the economy would grow by 4 percent in 2022, roughly double what is considered typical but less than 5.5 percent this year. If the virus proves crushing, though, growth could weaken sharply early in the year.

Which force is more powerful when it comes to prices — the hit to demand caused by Omicron-tied closures and layoffs, or the continued pressure on supply chains as consumers keep buying easy chairs and yoga pants and as factories shutter — will matter hugely.

Earlier this year, big price increases were largely reserved to goods that were in short supply as demand surged and as overtaxed shipping lines struggled to keep up. Officials expected that situation to sort itself out as the economy reopened and returned to normal.

What to Know About Inflation in the U.S.

Inflation, Explained: What is inflation, why is it up and whom does it hurt? We answered some common questions.The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.

But more recently, price pressures have spread into categories like rent, suggesting that uncomfortably quick overall increases might last longer. Supply chains have gotten worse instead of better over the course of 2021, and it has become clear that the road to normalcy will be longer and more winding than forecasters had counted on.

The Biden administration is trying pull what levers it can, including increasing the supply of oil and gasoline and trying to keep ports open longer in an effort to clear backlogs. But much of the job of controlling inflation falls to the central bank, which is in charge of fostering full employment and stable prices. Fed officials will have to sort through conflicting evidence to decide whether the economy needs to be cooled down — and, if so, by how much.

“We ended the year still on a high note — but it was a booming economy with heat,” said Diane Swonk, the chief economist at the accounting and advisory firm Grant Thornton. “We also have this inflation.”

Fed officials and most economists think price gains will slow from their current rapid pace next year. But nobody is certain how quickly and how completely that will happen, or what effect Omicron will have.

Thursday’s report provided further evidence of the pop in prices that a related measure — the Consumer Price Index — had shown two weeks earlier.

A closely watched measure of so-called core inflation, which strips out food and fuel because of their volatility, also came in high in Thursday’s report, rising 4.7 percent in November.

Andrew Hunter, a senior U.S. economist at Capital Economics, said that November could be the peak for the main Personal Consumption Expenditures index, because gas prices have caused a big part of the recent run-up and they have moderated in December. But the core gauge is likely to continue rising for a few months before beginning to slow.

“We need to be humble here,” Mr. Hunter said, noting that probably “one or two times last year, we thought we were at peak.”

Fed officials expect inflation to ease to 2.6 percent by the end of next year, their most recent economic forecasts showed. While that would mark an improvement, it would remain substantially above their 2 percent goal.

Given that backdrop, central bankers are beginning to react more decisively.

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An apartment complex under construction in Bakersfield, Calif., in November. Rising housing costs could keep inflation high.Credit…Alex Welsh for The New York Times

Fed policymakers announced this month that they are speeding up their plans to withdraw support from the economy, and they set themselves up to potentially raise interest rates several times next year. That would make buying a car or expanding a business more expensive, making it more attractive to save and less attractive to spend, cooling off the economy and, over time, weighing on inflation.

“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation,” Jerome H. Powell, the Fed chair, said last week. “We are committed to our price stability goal.”

But higher interest rates could also slow the jobs recovery as they weaken growth, denting hiring.

The labor market has been strong in recent months — open positions far outnumber available workers, and wages are rising, albeit not quickly enough to keep up with price increases in many cases. Inflation has been the worry weighing more heavily on consumers’ minds. Several measures of consumer confidence tanked in 2021 as shoppers factored in higher prices. (One, the Conference Board’s indicator, showed some improvement this week as inflation fears faded slightly.)

Whether the 2021 price burst teaches households to expect higher inflation going forward is critically important. From the Fed’s perspective, there is a risk that climbing inflation expectations could touch off an upward spiral in wages and prices, as people seek bigger raises to cover their climbing costs.

For the Biden administration, inflation worries threaten to unsettle voters, who are unhappy about paying more to get by.

Inflation F.A.Q.

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.

What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Where is inflation headed? Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly. There are plenty of reasons to believe the price burst will fade, but some concerning signs suggest it could last.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.

How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities — food, housing and especially gas.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

“It’s a devastating thing for people who are working class and middle class,” Mr. Biden said at the White House on Tuesday, adding: “It really hurts.”

And every high inflation data point provides fresh ammunition for Republicans, who have blamed the administration’s March 2021 pandemic relief and stimulus package for helping to fuel price increases by giving households money to spend. Inflation fears have already helped to derail a big chunk of Mr. Biden’s economic agenda, with Senator Joe Manchin III, Democrat of West Virginia, saying on Sunday that he could not support the president’s signature $2.2 trillion social safety net, climate and tax proposal.

Part of this year’s inflation surge ties back to demand.

American households amassed roughly $2.5 trillion in savings as lockdowns kept them at home and out of stores — and thanks to government stimulus checks, more generous tax credits and expanded unemployment benefits under the Trump and Biden administrations — helping to fuel the robust spending.

But one of those government programs, the expanded Child Tax Credit, is set to expire, and other key income supplements have already run out. That will leave at least some people and families more vulnerable next year. And while many economists believe rising wages and existing savings will continue to fuel spending, that could be complicated if many people lose jobs as a result of Omicron.

At the same time, a big chunk of the 2021 inflation emanated from supply chain problems.

In 2020, consumers began ordering couches, video game consoles and cars as the pandemic changed their lifestyles and caused them to spend less on restaurant meals and travel. The shift toward goods and away from services overloaded factories, container ships and ports.

The goods craze has lasted, and the global supply chain has been struggling to catch up all year. Prices have risen as the flow of imported parts and products has failed to keep up with demand. A dearth of computer chips meant that fewer new cars could be produced, for instance, pushing up prices.

There are a few hopeful signs that some of the backlogs may soon improve. Shipping container costs have eased slightly from peak levels, and some automakers have worked to secure semiconductor supplies. Ms. Markowska of Jefferies pointed out that the typical drop-off in consumer demand following the holidays may give beleaguered factories time to catch up.

But risks loom. Intel’s chief executive recently warned that chip shortages could last into 2023. The new variant could shut down factories in Asia — some important manufacturing hubs in China are already cutting activity — or further gum up domestic ports, perpetuating the problems.

“We are probably past peak supply chain chaos, but we haven’t returned to supply chain normalcy,” said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

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A testing site in Queens, N.Y. The surging Omicron variant makes the inflation outlook even hazier.Credit…Janice Chung for The New York Times

If Omicron forces many people to revert to staying at home, consumers could keep spending on goods, extending pressure on the supply chain. Businesses are also building up vehicle fleets and ordering new equipment, keeping factories chugging: New durable good orders remained strong in November, according to government data published on Thursday.

In the job market, Omicron could prevent workers who are afraid of becoming infected, or of infecting vulnerable friends and family, from applying to open positions. That could force employers to raise wages, and they might then increase prices to cover their labor costs.

The upshot? Inflation will probably fade next year, and may have already peaked according to some measures. But it is hard to guess whether and when it will return to levels that allow consumers and policymakers to breathe easier — and Omicron is making the trajectory for the 2022 economy less clear.

“There are a lot of things happening at once that could make this complicated to understand,” Ms. Swonk at Grant Thornton said, noting that she will be watching incoming data on jobless claims in January for an early hint at how the new variant is affecting employment. “We just don’t know yet. That’s the hardest part.”

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