WASHINGTON – For the economy, 2022 is a throwback year. And not in a good way.
Sometimes, it feels like the 1970s or early ’80s. Inflation is running high. The United States and its European allies are engaged in a less-than-Cold War with Russia. A sad sight that leaves people feeling sad and anxious.
It shouldn’t have happened like this.
When Federal Reserve policymakers made their 2022 predictions a year ago, they seemed almost happy. After two years of chaos caused by the pandemic, they have seen the US economy return to something close to normal.
They expect consumer inflation to reach 2.6% by the end of 2022 compared to 12 months ago. That may be just a few notches above their 2% annual target but nothing too alarming – and a clear recovery from high inflation earlier in 2021.
Fed officials, it turns out, underestimated how rising wages, federal aid, supply shortages and a latent consumer desire to spend conspired to accelerate inflation — and keep it high. But mostly they didn’t expect President Vladimir Putin to send thousands of Russian troops to invade Ukraine in February this year – an act of shocking aggression that boosted global trade in energy and agricultural products and sends the prices of oil, natural gas and grain. climbing.
“Without that Russian invasion,” said Mark Zandi, chief economist at Moody’s Analytics, “we would be in a very different place today.”
It’s normal to wait.
US inflation, an afterthought for decades, rose again with a vengeance this year, reaching highs not seen since the early 1980s. Running prices have driven down inflation-adjusted wages for Americans — despite high wage growth for many — and put consumers in a bad spot. The price hikes have forced the Fed to aggressively raise interest rates at the risk of plunging the world’s largest economy into recession.
It’s not just the United States. Inflation plagues countries around the world. The International Monetary Fund expects global inflation to hit 8.8% this year. That’s the highest rate since 1996.
Europe has been hit hard by Putin’s power shock. Consumer prices rose by double digits across the continent and the United Kingdom. The spending power of consumers has been crushed. Many see a European recession by 2023 as a near certainty.
By the end of the year, however, relief seemed to be coming – temporary, gradual, perhaps, but likely ongoing. Inflation figures in Europe and especially in the United States are decreasing.
“I think we have seen the peak of inflation; maybe back in the summer,” said Zandi. “We will see better inflation numbers in the next 12 to 18 months.”
But for now, the pain of higher prices continues to inflict hardship on many. For American workers, inflation-adjusted hourly pay fell 1.7% in November from a year ago. This is the 20th consecutive month that that number has declined year-over-year.
And although overall inflation in the United States slowed in November for the fifth consecutive month, food prices continued to rise. Compared to 12 months earlier, coffee has increased by 15%. Bread increased 16%, frozen vegetables 18%, canned fruit 21% and eggs 49%.
Businesses large and small are struggling to contain higher costs and to determine if and how much they can pass on their higher costs to their customers as higher prices.
Wayne Shumar, who owns Pepperronnies Family Restaurant in Brownsville, Pennsylvania, is so upset about inflation that he posted his receipts for shredded lettuce and tomatoes on his restaurant’s Facebook page. Those prices doubled in six months.
To save money, Shumar switched from using one vendor to four. He scans each of their websites for the best deals before placing an order. He also takes orders himself to avoid fuel surcharges by vendors.
“Before I spent a lot of time outside the dining room,” Shumar said. “That’s what a family restaurant is all about. Now I spend a lot of time sitting here, looking at the computer screen, trying to cut costs.”
Likewise, Logan’s Roadhouse, a chain of 136 restaurants, contended with a 28% increase in premium sirloin prices. It expects prices to rise by another 20% early next year.
“We’re constantly reviewing the cut of meat,” said Josh Kern, CEO of Logan’s parent company, SPB Hospitality. “Are there any recipe changes we can make?”
In another cost-cutting move, Logan’s switched from premium-priced waffle fries to straight-cut fries. (So far, diners haven’t rebelled.) Butter is up 42% from last year. That’s why Kern’s company negotiated with the butter sellers.
The chain now makes its own macaroni and cheese instead of buying it from a manufacturer.
“We looked at everything in the pantry, and we can make just as good macaroni and cheese,” Kern said.
Pucker Up Lemonade, which sells drinks at its stand in Compton, California, and at festivals and convenience stores, bought the refillable cups from a local vendor for $1 each. Today, those cups are $2.50. The owner, Karneisha Christian-Stewart, prepared to buy it from China, calculating that she could save $15,000 on a bulk order of 10,000 cups.
“I’ve never imported before,” says Christian-Stewart. “I have to do that because the cost savings are huge for a small business.”
John Catsimatidis, who owns the New York supermarket chains Gristedes and D’Agostino’s, complained that beef and chicken cost about 30% more than a year ago. The price of fish increased even more.
The unexpected and unwanted increase in inflation in 2022 is not the only wild change that has taken place in the economy since the early 2020s.
First, COVID-19 brought economic activity to an abrupt halt as businesses closed or reduced hours and consumers stayed home as a health precaution. In the United States, the economy took off: It contracted at a record annual rate of more than 30% from April to June 2020. Employers shed a staggering 22 million jobs in March and April 2020.
The Fed and other central banks are lowering rates, and governments are delivering more stimulus to the economy through spending programs. The result is an incredible rebound. Flush with government aid, consumers, especially in the United States, are splurging on furniture, appliances, exercise equipment, video games and other manufactured goods.
A sudden burst of spending causes shortages, shipping delays and rising prices. Companies are recalling many of the workers they laid off in early 2020. However, they still can’t hire fast enough to keep up with customer orders. Many of them are raising wages sharply to try to attract and retain workers.
Consumer prices are set to rise in the spring of 2021. But Fed Chair Jerome Powell has suggested that higher inflation is likely to be “transitory” and ease once bottlenecks in the global supply chain are resolved. -snarled.
Yet every month, supply shocks refuse to go away. Sometimes, strange incidents intervene. A surprise freeze in Texas has paralyzed petrochemical production. A mammoth container ship is stuck in the Suez Canal and trade between Asia and Europe is cut off. A drought in Taiwan has disrupted semiconductor manufacturing. An avian flu wiped out a near-record number of chickens.
The factors combined to send inflation steady to multi-decade highs until 2022.
“Some of these things you can’t do,” said Daniel Swan, co-leader of the operations practice of the consultancy McKinsey & Co. “I don’t know what is normal anymore.”
More importantly, Putin invaded Ukraine and blew up the world’s energy and food markets.
In response, the Fed has raised its benchmark rate seven times this year, most recently on Wednesday. Its key rate, which affects many consumer and business loans, is now at its highest level since 2007.
The Fed aims for higher rates to slow the economy enough to control high prices without tipping the economy into a recession — a notoriously difficult maneuver to achieve.
At least supply chains are gradually working out their kinks as demand for manufactured goods slows. Many ports, which lost backlogs at the beginning of 2022, are again operating normally. Lower shipping costs alone are likely to shave half a percentage point off global inflation, estimated Simon MacAdam, senior global economist at Capital Economics.
The official inflation figures look better. The US government reported this week that American consumer prices rose 7.1% last month from a year earlier – still high but a big improvement. Year-on-year inflation rose 9.1% in June and has slowed every month since.
Even the 10% inflation last month in the 19 countries that share the euro currency fell from 10.6% in October. The United Kingdom government reported that annual inflation fell to a painful 10.7% last month from 11.1% in October.
Oil prices have been falling since early November, driving down pump prices. A gallon of unleaded gasoline cost an average of $3.19 on Thursday, up from $5.02 in mid-June, according to AAA.
All that said, the fight against inflation is far from over. Some economists worry that labor shortages will persist, particularly in labor-intensive businesses, thus continuing to put upward pressure on wages and prices.
Inflation shifts from goods to services, where it is often more uncontrollable. According to the inflation gauge favored by the Fed – the price index of the government’s personal consumption expenditures – the prices of services rose by a strong 0.4% in October and 0.6% in September and August.
“Inflation is likely to rise less in 2023 than in 2022,” said Jason Furman, a Harvard economist who is a senior adviser to President Barack Obama. “The problem is that ‘lower’ could mean 3% or 4%, which is too high for the Fed. And lower is happening in part because the economy is weakening.”