The prices have soared so much that it will take some time for them to come back down to earth. In other words, the uncomfortable inflation numbers of 2021 will likely stay with us until the start of the new year.
The most recent price data we have is in November, when two of the most closely watched inflation measures – the Consumer Price Index and the Personal Consumer Expenditure Index – each peaked in 39. year.
This last index is the one to which the Federal Reserve pays the most attention when evaluating the country’s inflation.
Why will inflation stay high?
Several factors keep prices high.
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One is the supply chain chaos that peaked last summer. While some bottlenecks have eased, the problems are not fully resolved. And as long as it is more expensive – and takes longer – to move goods around the world, higher transportation costs will likely be passed on to consumers.
Another important factor is the high cost of raw material prices, leading to soaring energy and food costs. Prices in both sectors have skyrocketed this year and have added a good chunk to the inflation we have already seen. In the case of food, high prices have forced some consumers to buy less or to change stores.
Economists don’t expect it to improve next year. Along with strong demand and shipping costs, rising fertilizer prices and persistent bad weather could keep food prices high, even as other inflationary pressures fueled by the pandemic ease.
The rise in rents also remains a concern. This is important because housing is a large percentage of what people spend. If rents take up a bigger slice of the pie, consumers could end up spending less, which would be bad news for the recovery.
In November, rents rose 0.4% for the third month in a row, according to economists at Bank of America, pointing to higher and more persistent inflation going forward.
The “recent widening of inflationary pressure has coincided with a noticeable pick-up in rent inflation,” said Peter B. McCrory, economist at JPMorgan, “which jumped to its highest monthly rate in 20 years in the September CPI report and has remained firm since then. “
And then there is Omicron.
Several countries, including the United States, have seen record Covid-19 infections in recent weeks due to the rapid spread of the variant. If this leads to a new round of lockdowns, it could once again change the way consumers spend and drive demand for home products.
Perhaps more importantly, Omicron could have an impact on energy prices: if restrictions come back and people travel less, lower energy demand would lead to lower prices, which would help make lower inflation.