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You may have noticed it already, but yes, many of the things you need or love have become more expensive. Much more expensive.
Consumer prices rose 4.2% in April from lows of a year ago when the global economy was hit hard by the coronavirus pandemic, according to the Labor Department on Wednesday.
The Labor Department added that this was the largest increase in 12 months since the 4.9% increase in September 2008.
Prices are up 0.8% month over month.
The accelerating inflation comes as companies have to pay more to secure critical materials such as wood and steel amid ongoing disruptions in the global supply chain and the government has also pumped trillions of dollars into the economy in an effort to mitigate the impact of the coronavirus, which is contributing to inflation.
“All you can think of is up,” says William Lee, chief economist at the Milken Institute.
For an economy that is finally starting to recover from a pandemic recession, high inflation poses a great potential risk. Companies reported record profits, but they may struggle if they continue to face higher costs. Millions of Americans remain unemployed or struggling, and are likely to be disproportionately affected by rising prices.
What matters most is how long the high prices will last.
“The one thing economists always try to do is distinguish between rising prices and inflation,” Lee says.
Federal Reserve Chairman Jerome Powell argued that the economy is going through the first. The policymaker insists the price hike will be short-lived – or “temporary” – reflecting supply chain crises and pent-up demand from Americans who are now happy to spend money on trips or overseas activities.
The Fed wants inflation to be around 2% in the long run, and policymakers have committed to keeping interest rates near zero for now. But the risk is if prices continue to rise beyond what the Fed expects.
Kellogg’s and General Mills have already raised grain prices, for example. In recent weeks, airline ticket prices have become more expensive, as have everyday items from Coca-Cola to fuel.
Another factor is wages. Restaurants and hospitality are among the sectors that have struggled to find workers recently due to what economists believe are a combination of factors, including health concerns and the government’s extended unemployment benefits.
This forces some companies to offer higher wages or benefits in an effort to attract workers, which may contribute to higher inflation.
“We’re restarting the global economy, and it takes time to work through these supply chain issues, connecting workers with employers,” says Julia Coronado, president of Macropolicy Perspectives, an economic consulting firm.
“We will probably take us all summer, and in the fall, to find out where the dust is settling and how the economy after the epidemic started to emerge.”