OFR RESEARCH ON INFLATION
Inflation Measures of consumer
price inflation began to rise in the spring of 2021 and continued to rise
through the start of 2022, climbing to high levels not seen in several decades
and remaining well above the Federal Reserve’s target of 2% per annum. In July 2022, the consumer price index (CPI)
increased 8.5% yearover-year after reaching 9.1% in June. Increases remained above 8% through the
summer and early fall. The personal
consumption expenditure core price index (PCE Core), which excludes food and
energy, has hovered at around a seasonally adjusted 5% throughout 2022 (see
Figure 1).1 Durable goods inflation, which was significantly below services
price inflation over the last decade, has risen above it since 2021. Several
factors have been driving prices higher, including strong aggregate demand, a
post-pandemic reopening of the economy, and a material shift from services to
goods. In addition, demand increased as
the U.S. introduced an unprecedented fiscal and monetary policy response to the
COVID-19 pandemic. For example, the
American Rescue Plan Act authorized $1.9 trillion in federal government
spending in 2021, in addition to the $2.2 trillion in spending authorized by
the Coronavirus Aid, Relief, and Economic Security (CARES) Act the 16 Figure
1. Inflation Measures (percent change)-2
0 2 4 6 8 10 PCE PCE core CPI core CPI Sep 2015 Sep 2016 Sep 2017 Sep 2018 Sep
2019 Sep 2020 Sep 2021 Sep Note:
Chain-type price index, percent change from a year ago, monthly,
seasonally adjusted. Sources: FRED,
Office of Financial Research Figure 2.
Port of Long Beach Vessels Average Days at Anchor & Berth (days) 0
10 20 30 Sep 2022 Jun 2022 Mar 2022 Dec 2021 Sep 2021 Jun 2021 Mar Note: Data are 20-period moving average of daily
average for business days. Sources:
Bloomberg Finance L.P., Office of Financial Research previous year. According to one estimate, these sizable
fiscal support measures can explain about three percentage points of the recent
rise in inflation.2 Furthermore, supply chain distortions from the COVID-19
pandemic persist both at home and abroad and have been larger and longer than
anticipated, putting upward pressure on prices.
Waves of COVID-19 pandemic infections Figure 3. Domestic and Global Energy Prices (percent
change) Jun 2017 Mar 2018 Dec 2018 Sep 2019 Jun 2020 Mar 2021 Dec 2021 Sep 2022
U.S. natural gas price Brent WTI CPI energy Note: Percent change from a year ago, monthly, not
seasonally adjusted. Sources: FRED,
Office of Financial Research and subsequent lockdowns continue to disrupt
supply chains abroad, particularly in China,3 and the services sector
domestically. Several disruptions along
the supply chain, coupled with strong demand, have resulted in significant
increases in the time it takes for goods to reach consumers (see Figure
2). In addition, producer prices for
freight costs have been increasing significantly since 2021 due to high demand,
port congestion, gas prices, and pandemic-related supply chain stresses. Some of these costs will have been passed on
to consumers, putting further price pressures on consumer goods. Forecasters point to these combined stresses
to supply and demand as forces driving prices upward.4 The high price of energy
has been one of the key contributors to the recent record inflation, as energy
has been one of the fastest-rising components of several price measures. Domestic and global energy prices increased
significantly throughout FY 2022, affecting domestic producers and importers. In addition, Russia’s war against Ukraine
significantly disrupted European energy markets. Domestic prices have not been spared fallout
from the war, as price increases hit consumers at the gas pump in the middle of
2022. As of July 2022, the CPI: Energy
Services in U.S. City Average had increased by 32.9% from a year ago but began
to come down as the year progressed (see Figure 3). Inflation also continues to
run high globally. Inflation reached as
high as 10.7% in the European Union (EU) and 10.4% in the United Kingdom. Inflation was more moderate in the large
Asian economies, such as China (+2.1%) and Japan (+2.5%); however, both
countries saw relative increases over 2022.
Inflation was generally higher in the U.S. than in Europe over the
previous 2020-21. On the other hand, the
effects of Russia’s war against Ukraine have since accelerated inflation in
Europe, matching the level of inflation in Europe with that of the U.S. (see
Figure 4). As measured by the Federal Reserve Bank of Philadelphia’s Aruoba
Term Structure 17of Inflation Expectations (see Figure 5), long-run inflation
expectations (i.e., over the next 10-15 years) were generally between 2% and
2.5% through 2021 but seem to be settling at around 2.5% as of 2022. This slight increase could put more upward
pressure on prices. In addition,
short-run inflation expectations, which tend to be much more volatile, are also
reacting to current inflation by inching higher. Short-run survey expectations indicate that
forecasters believe inflation peaked in Q2 2022 and will decrease from 3% to 5%
by August 2023.5 Long-run inflation expectations that deviate from target and
react strongly to short-run price volatility, commonly called unanchored
expectations, would create significant uncertainty about the future economy’s
direction and policy. Unanchored
expectations could create volatility in financial markets, amplify various
macroeconomic risks, and prove more costly to reduce if they become entrenched.
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