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Inflation in 2022

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America is ending the year with the highest inflation rate in decades. That does not speak well for the year 2022. 

Prices have risen so high that it will take some time for them to go down to earth. In other words, the unsettling inflation figures of 2021 are likely to linger far into the New Year. 

The most current pricing data we have is from November, when two of the most closely monitored inflation indicators, the consumer price index and the personal consumption expenditure index, both reached 39-year highs. 

When analysing the nation’s inflation, the Federal Reserve focuses mostly on the latter index.

There is some reason to be optimistic: the central bank, mandated with keeping prices stable, is reducing its economic support and is projected to hike interest rates next year to manage inflation and prevent the economy from overheating. 

And, according to last month’s statistics, prices rose at a slower rate in November than in October for both the CPI and the PCE indexes. Even though the slowdown was only 0.1 percentage point, this is encouraging news.

Economists like to examine price variations over a set length of time, generally a year. So a minor slowdown like November’s won’t make a difference just yet. 

These minor slowdowns might take months to show up in the statistics. A lot of huge figures are baked into the 12-month data set after a year of prices skyrocketing due to strong demand and supply chain turmoil. Even if inflation suddenly plummets, it will take time for the main indexes to catch up. When Fed Chair Jerome Powell says “base effects,” he is referring to this.

Will inflation remain high?

Several forces are conspiring to keep prices high. 

One example is the supply chain instability that erupted last summer. Even though certain bottlenecks have been alleviated, the problems are not completely resolved. And as long as it is more expensive — and takes longer — to transfer goods around the world, increasing transportation expenses will almost certainly be passed on to consumers. 

Another significant contribution is the high cost of commodity prices, which has resulted in rising energy and food prices. Prices in all industries have risen significantly this year, contributing significantly to the already high level of inflation. In the case of food, rising prices have compelled some shoppers to buy less or move locations.

Economists do not anticipate things to improve much in the coming year. Aside from strong demand and transportation costs, increased fertiliser prices and persistent bad weather may keep food prices high even as other pandemic-fueled inflationary forces subside. 

Rent increases are also a source of concern. This is significant since housing accounts for a large portion of what individuals spend their money on. If rents devour a larger portion of the pie, consumers may end up spending less, which would be terrible for the economy. 

According to Bank of America economists, rent jumped 0.4 percent in November for the third month in a row, indicating stronger and more sustained inflation in the future.

The recent expansion of inflationary pressure has coincided with a substantial rise in rental inflation, which rose to its highest monthly rate in 20 years in the September CPI data and has remained solid since then.

Then there’s the case of Omicron. 

Because of the quickly spreading variety, several nations, including the United States, have reported record high Covid-19 infections in recent weeks. If this results in a new wave of lockdowns, it may affect the way people spend and increase demand for stay-at-home items. 

Perhaps more crucially, Omicron might have an influence on energy costs: if limitations are reinstated and people travel less, reduced energy consumption means lower prices, which would help bring inflation back down.

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