Tuesday’s Labor Department announcement showed that the Producer Price Index, which measures inflation before it reaches consumers, rose 1% from December. Although the year-over-year growth was lower than the 9.8% record in November and December, it was still well above what economists expected. Wholesale inflation increased 0.8% in December, and 8.3% in January 2021, excluding volatile food and energy prices.
In a note, Bill Adams, Comerica Bank’s chief economist, stated that “the big picture is that inflation gained momentum and expanded in the economy.” Prices rose in January due to the Russia-Ukraine war. Fears that Russia’s conflict might slow down its deliveries of oil and natural gas to global markets prompted energy prices to rise. However, prices for other goods and services rose quickly in January.
Four-decade high
Last week, the government reported that consumer prices have risen to their highest point in forty-five years. This squeezed households and wiped out raises. It also reinforced the Federal Reserve’s decision last week to increase borrowing rates. The Consumer Price Index increased 7.5% across all sectors of the economy: food, furniture, rents for apartments, airfares and electricity.
After being under control for forty years, inflation resurfaced as an economic problem last year after the U.S. recovered with surprising speed from the devastating coronavirus depression in 2020. Companies were caught off guard by the bounce back and scrambled for workers and supplies to meet unexpected orders from customers who had received government relief checks. The pressure was on freight yards, ports, and factories. Shipments were delayed, and prices started to rise.
According to the Labor Department’s January report, wholesale prices increased 1.3% from December, while services rose 0.7%. This was driven by an increase in outpatient hospital services costs, which jumped 1.6%.
“The latest increase in producer prices was driven primarily by another strong gain of goods prices, but increases were continued to widen,” Oxford Economics economists Mahir Rasheed (Oxford Economics) wrote in a report. “Producer prices won’t revert to their normal patterns due to the combination of persistent supply disruptions, and higher energy prices until later in the year.”
Food and energy were the most affected by inflation — which is bad news for consumers. The wholesale food price increased 12.8% over the previous year while energy prices rose 29.4%.
Kurt Rankin, PNC Economist, stated in a report that food manufacturers are facing higher costs for both their actual products and their packaging and shipping. This is a sure sign that food price inflation will continue into 2022.
He said, “Those food and energy components are often the most noticeable and most difficult to absorb by households.”
Economists predict that inflationary pressure will drop this year, as supply chain bottlenecks start to ease and the Federal Reserve starts to raise interest rates. Consumers will not receive government relief checks.
