Consumer Prices Rose at Fastest Pace Since 1982

Prices are rising at the fastest clip in nearly 40 years, fresh data released on Friday showed, as supply chain disruptions, rapid consumer demand and rising housing costs fuel an inflationary burst.

The spike in consumer costs could spell trouble for officials at the Federal Reserve and the White House, who are trying to calibrate policy at a moment when the labor market has yet to completely heal from the pandemic but price increases are proving more persistent than policymakers had expected.

The Consumer Price Index climbed by 6.8 percent in the year through November, the data showed, the fastest pace since 1982. After stripping out food and fuel, which can move around a lot from month to month, inflation climbed by 4.9 percent. That was the quickest annual reading since 1991.

Monthly price increases — the change between October and November, rather than over the past year — did moderate somewhat, but still rose at an unusually rapid pace.

The question is what happens next. Fed officials have become increasingly concerned about inflation, both because the uptick has lasted longer than expected and because it shows signs of broadening to areas less affected by the pandemic, ramping up the risk that rapid gains could become entrenched.

“It just keeps the pressure on Fed officials,” said Kathy Bostjancic, director of U.S. macro investor services at Oxford Economics.

Earlier this year, price increases were concentrated in goods. Used cars and couches were in demand as the pandemic changed people’s lifestyles. Factories around the world struggled to keep up with the surge in buying, in part because shutdowns tied to the virus upended production. Shipping routes and ports also became clogged as demand followed an atypical pattern, with too many U.S.-bound goods trying to leave Asia in particular. As supply came up short, prices leapt higher.

Those disruptions were expected to be temporary. Instead, they have lasted for months, as demand for products remains strong and the virus continues to disrupt manufacturing and transportation.

Inflationary pressures are also broadening to areas that are not as directly affected by the virus. Rental costs, for instance, have picked up sharply as rocketing home prices lock would-be buyers out of the market. Housing costs make up a big chunk of the Consumer Price Index, so that is helping to boost overall inflation.

Jennifer Callahan, a mother of two in the Denver area, has been renting a three-bedroom house since her prior home burned down early in 2020. But local rents are jumping, and she worries she won’t be able to find a comparable place for anything like the $2,400 she and her housemate are paying if their lease isn’t renewed.

“Homes in this area are selling for crazy, crazy amounts of money,” she said. “It totally then screws up the rental market.”

As costs rise across a wider array of goods and services, the Fed is growing more worried.

“Generally, the higher prices we’re seeing are related to the supply-and-demand imbalances that can be traced directly back to the pandemic and the reopening of the economy, but it’s also the case that price increases have spread much more broadly in the recent few months,” Jerome H. Powell, the Fed chair, said during congressional testimony late last month. “I think the risk of higher inflation has increased.”

Fed officials are putting themselves in a position to use their policy tools to weigh down inflation, should doing so has become necessary.

Mr. Powell signaled last week that the Fed, which outlined a plan to begin cutting back on economic support in November, is poised to discuss speeding up that process at its two-day policy meeting next week. Economists expect the Fed to announce a plan to slow down its monthly bond purchases fast enough so that the program ends sooner than it originally planned.

That would mean the Fed is adding less juice to the economy with each passing month. It would also allow officials to raise interest rates, their more powerful tool, more quickly. Policymakers have been clear that they would prefer to finish buying bonds before raising borrowing costs, which are set near zero, so that their policy tools are not working against one another.

Friday’s data will keep policymakers on track to accelerate their plans to taper off bond purchases, said Alan Detmeister, a senior economist at UBS and former chief of the wages and prices division at the Fed Board in Washington.

“This is still an enormous — a very, very strong — number,” Mr. Detmeister said, explaining that while he expects inflation to moderate, it may take until the middle of next year for that to show up clearly in the year-over-year data.

“It seems pretty clear that they’re going to speed up the taper,” he added.

Moving to the next step — raising rates — would make debt of all kinds, from mortgages to car and business loans, more expensive. That would likely slow spending and hiring, cooling off demand and weighing down buoyant housing costs. The combination could help to put a lid on price gains.

But it could also leave the country with a less competitive labor market. That could be bad if the millions of people who remain out of the labor market compared to before the pandemic decide to embark on a job hunt. Many workers have yet to return because of child care issues and other virus-related factors.

Even so, the Fed is wary of letting inflation rocket out of control. In the 1960s, the central bank failed to take sufficiently decisive action to tamp down rising prices. Inflation soared, rising to double-digit levels during the 1970s, and Paul Volcker, then the Fed chair, pushed interest rates up sharply to get things under control in the early 1980s.

The hit to demand caused a painful recession before it brought price gains to heel. The mistake, and its aftermath, has haunted central bankers ever since.

This time around, Fed officials are watching wages and consumer expectations to try to gauge whether prices are on the cusp of becoming more problematic.

As housing and other day-to-day costs rise, workers may begin to ask for raises to help offset the financial blow. Climbing wages can feed into inflation as companies pass rising labor costs on to consumers, and as bigger paychecks help households to keep spending, sustaining consumer demand.

Data show that pay is already climbing briskly. Employers are competing for laborers at a time when job openings far exceed the number of people actively looking for jobs, and they are lifting pay to attract and retain workers. The Employment Cost Index, a measure the Fed watches closely, picked up notably in the three-month period that ended in September.

Wages are rising especially rapidly for low earners, though they have not kept up with the acceleration in prices for most workers in recent months. Still, continued government benefits — including an expanded child tax credit — may mean that families are better positioned to afford climbing expenses.

Because consumers have had the wherewithal to spend, companies have been managing to charge more, protecting and even increasing their bottom lines as input costs climb. Profit margins for a large swath of companies have been widening this year, including in some of the industries hardest-hit by supply problems.

“We are actually seeing that the price increases that we’ve put through as a result of covering the costs that we’re getting from input product and freight is being absorbed by the customer,” Bruce K. Thorn, chief executive officer at Big Lots, said on a Dec. 3 earnings call, later adding that “we’re not seeing that resistance.”

Democrats have begun to blast big companies for taking advantage of the moment.

“Now, while working families are just starting to get back on their feet, mega corporations would rather pass higher costs onto consumers than cut into their profits,” Senator Sherrod Brown, a Democrat from Ohio, said a recent hearing.

But Republicans have put the blame on Mr. Biden and Democrats, a development that threatens to imperil the president’s bigger agenda, including the $2.2 trillion climate and social policy bill that he is attempting to pass along party lines. Centrist Democrats have begun questioning the wisdom of pouring more money into the economy at a time when demand and prices are hot.

“The unknown we’re facing today is much greater than the need that people believe in this aspirational bill that we’re looking at, and we’ve got to make sure we get this right,” Senator Joe Manchin III, Democrat from West Virginia, said earlier this week. Mr. Biden will need the support of every Senate Democrat to pass the legislation, making Mr. Manchin’s vote critical.

Inflation is also a political liability for the White House among voters, because it is making day-to-day life more difficult for many Americans, especially those who rely on savings held in relatively low-risk investments like savings accounts or certificates of deposit. Those people are seeing the value of their holdings decrease.

Retirees living on Social Security will see their benefits increase — the cost of living adjustment for 70 million Americans will be 5.9 percent in 2022 — but they are already feeling the brunt of higher consumer prices.

Diana Madoshi, a retired nurse in Placer County, Calif., who relies on Social Security benefits, said higher prices at the grocery store have started to burden her budget. A carton of eggs, which cost about $2.80 before the pandemic, is now nearly $4, she said.

She has been taking fewer Uber rides to doctor appointments and has cut back on buying clothing to offset the costs.

“This is just another harsh reality of what we’re going through right now,” said Ms. Madoshi, 75. “And there’s nothing I can do about that.”

— Madeleine Ngo contributed reporting.