Why High Inflation Has Lasted for So Long
Narrator: Last year, policymakers were convinced that inflation would be…
Jerome Powell: Transitory.
Joe Biden: Temporary.
Janet Yellen: That’s a transitory thing.
Narrator: But over a year later…
Janet Yellen: I think I was wrong then about the path that inflation would take.
Narrator: For most of 2022, inflation has lingered above 8%, a 40-year high. It’s affected everything from gas prices to groceries. But why has it lasted longer than many experts expected? There are a few key factors that propped it up and made it tricky to predict what comes next.
The first is consumers have more to spend. At the beginning of the pandemic, emergency measures from Washington, including stimulus checks, loan pauses, low borrowing costs and more flushed the economy with cash.
Jon Hilsenrath: And those resources really built up and it was a large stockpile of dry tinder that was ready to spend as the economy loosened up.
Narrator: This is the US personal saving rate. The amount of money households have left over after they spend and pay taxes every month. This spike and the ones that followed contributed to $2.3 trillion in extra savings, which is one of the reasons consumers have continued to spend as prices have gone up.
Jon Hilsenrath: There was pent-up demand. Humans are social animals. They wanted to go back out to restaurants; they wanted to see their friends; they wanted to visit families. It resulted in more spending, but it also resulted in companies demanding higher prices.
Narrator: The Fed estimated that there was still a stock of $1.7 trillion in excess savings in mid-2022. And as consumers have continued spending, companies have been hiring to meet that demand.
Jon Hilsenrath: There was just such a demand for workers after the pandemic that companies had a lot of openings for positions that they just couldn’t fill and an environment of very low unemployment.
Narrator: Here’s a chart that helps show just how strong the job market is. This is the number of job openings, and this is the number of people who are unemployed.
Jon Hilsenrath: On the one hand, you have an excess of demand from all the money in household bank accounts and the other is you have a deficit of supply from shortages of not only workers but also goods sourced in global supply chains.
Narrator: To help try to fill those vacant positions, and encourage workers to stay on, businesses have also raised wages. Compensation for private and state and local government workers has grown by 5% from last year. But when companies raise wages, they often raise prices to make up the difference.
Jon Hilsenrath: As wages go up, companies respond by raising prices. But as prices go up, people say: my cost of living is going up, you’ve gotta increase my pay. And this process starts feeding on itself.
Narrator: But aside from consumer spending power and the labor market, inflation has just been a really hard target to hit.
Jon Hilsenrath: It’s kind of been like watching a game of Whac-A-Mole. Every time you see inflation pop up in one area and think you understand it, it puts its head and down pops up in some other area.
Narrator: Price increases have rippled through the economy at different times. In 2021, prices for things like groceries, cars and gas were pushed up by economic recovery from the pandemic. Then in 2022, airline tickets rose as well as the war in Ukraine drove up the price of jet fuel. And as some of those prices started to ease, housing kept going up as the economy reopened and rents increased.
Jon Hilsenrath: So inflation has run right through your home, from the stuff you put in your home, the televisions and the furniture to the actual cost of living in the home, from the goods sector to the services sector, right there in your own day-to-day life.
Narrator: And that bouncing around has made it harder for the Fed to forecast how long policies need to be enacted in order to bring inflation down.
Jerome Powell: I…I just think that the inflation picture has become more and more challenging over the course of this year, without question. That means that we have to have policy being more restrictive and that narrows the path to a soft landing.
Jon Hilsenrath: It’s using this instrument that hits certain sectors of the economy harder than others. So it raises interest rates, which raises the cost of interest in interest-sensitive sectors, like housing, but it might not hit other parts of the economy where inflation is acute.
Narrator: The International Monetary Fund says that interest rate increases have their peak effect on inflation after three to four years.
Jon Hilsenrath: Monetary policy has long and variable lags, which is another way of saying it takes time for these effects to work their way into the economy. And the backdrop to the economy is constantly changing. That’s the variable part. So it takes time to play through, and how it plays through is unpredictable. So the story is still unfolding.
Narrator: The Fed made another interest rate increase at the beginning of November and said that they may push interest rates higher than originally expected.