It has now been a year of this. A report released on Tuesday showed that in March, America’s overall inflation rate reached a new generational high of 8.5 percent — a level not seen since May 1981. It was the 12th straight month during which the Consumer Price Index, which the federal government uses to measure cost variations in groceries and just about everything else, rose beyond a level not seen since before the financial crisis. Prices are rising so fast that U.S. workers got a functional 0.8 percent pay cut just over the course of the month.
Gas prices had already been rising well before Russia’s invasion of Ukraine, but they clearly spiked last month: March alone saw an 18 percent increase. The average gas price is $4.10 — receding from its recent peak but still up 50 percent for the year. The Biden administration can’t do much about that, but one proposed remedy, to extend the sale of a more noxious blend of cheaper gas, won’t be felt by consumers until this summer.
Americans aren’t confident this is ending anytime soon. Pessimistic consumers expect inflation to drag on at high levels for another year, according to a survey from the Federal Reserve Bank of New York released on Monday. And the consensus of the experts, many of whom once forecast that inflation would subside quickly, is in line with that prediction. Economists think that inflation may have peaked in March, but even if the overall rate starts coming down a little bit in the coming months, that will only be because prices a year ago were already starting to climb. That is, everything is likely to remain expensive, and continue to get even more so, but at a slightly slower pace. Besides, predictions that the worst is behind us have been wrong before.
The one possibly major bright spot here is that the Fed’s preferred gauge of inflation — the so-called Core CPI, which cuts out gas and food — actually fell for the month, with the price of used cars and trucks declining the most since 1969, according to Bloomberg. “If there is one silver lining from today’s report, it’s that Core inflation — as opposed to the headline 8.5% annual inflation — has moderated somewhat,” Chris Zaccarelli, the chief investment officer at Independent Advisor Alliance, said in a research note.
That note of optimism aside, Fed governors have been warning for weeks that they’re prepared to take drastic measures to keep inflation from getting worse, and the new report clears the way for the Fed to tighten the economy at the fastest pace since 2000 — a move that could plunge the country into another recession. The Fed’s cure for this is also likely to have deeply varying effects on people depending on their jobs and income levels. You can probably guess who will be most adversely affected. Once the Fed really starts to steepen interest rates — and shed much of its $9 trillion bond portfolio, spreading more risk back into the private markets — it will likely lower the values of the wealthiest Americans’ portfolios while eliminating jobs for the people who make the least.
There are clear historic parallels here. The last time inflation was this bad, in 1981, America was already starting to grapple with resurgent inequality — the December 27, 1981, issue of New York featured a cover story on the exploding homeless population and also ran a piece on the executive headhunters who get the wealthy and powerful even better jobs. Inflation, while high, was falling steeply after reaching a high of 14 percent the year before. The unemployment rate then was 7.3 percent, more than double the current level, and the country was in the midst of a severe recession that would last for nearly another year. But there was also a brewing sense of optimism that the inflation rate would soon start falling quickly, which more or less happened.
The Fed, then led by Paul Volcker, had a few months earlier shocked the economy with a surprise hike to interest rates of 20 percent and was on its way to easing borrowing costs. While that drastic maneuver largely ended the era of high inflation, the makeup of the country’s assets was permanently changed. The only portion of the U.S. population that saw any wage gains in 1982, the year after Volcker’s shock, was the top 20 percent of wage earners, according to U.S. Census data. When Fed chair Jerome Powell intentionally makes everything more expensive in an attempt to tamp down the consumer spending that’s driving price increases, those already struggling to get by are likely to be hardest hit.
The Fed’s task might be harder this time around for multiple reasons. A rapid spike in U.S. borrowing costs wouldn’t have much of an effect on the war in Ukraine or lockdowns in Shanghai. And the bizarre circumstances that have made this economy what it is — $5 trillion in stimulus plus a rapid shift to working from home for a significant slice of the population — has also made it hard to pinpoint why prices are getting thrown out of whack. How much of the rise in rent — which in some polls appears to be up 17 percent, even though the CPI shows its equivalent measurement up by only about 5 percent — is getting left out of the calculation? What portion of gas’s 48 percent spike in price is really because of the war, since the U.S. didn’t get much gas from Russia anyway? If groceries rose 10 percent, and eating at restaurants went up 6.9 percent, then what’s causing so many people to continue to stay at home in just about every major American city? For now, there are a lot of questions about how and when this will all end, and not a lot of answers.
