US inflation is high, uncertainty rampant as economy heads into 2022

NEW YORK (NYTIMES) - As the year draws to a close, United States inflation remains stubbornly high, and the Omicron variant of the coronavirus poses looming uncertainty about what might come next, keeping the pressure on the Federal Reserve and President Joe Biden to do more to tame rising prices.

The personal consumption expenditures price index, which the Fed officially targets when it aims for 2 per cent annual inflation on average over time, climbed 5.7 per cent in November from a year earlier - the fastest pace since 1982 - the Commerce Department said on Thursday (Dec 23).

It was yet another sign that high prices, which many economists once hoped would fade quickly, are instead persisting, burdening consumers and worrying government officials.

The data came as a rising number of Omicron infections makes the inflation and economic outlook hazier. On one hand, the virus could slow the growth of the economy and of prices if it prompts furloughs at a time when the government is no longer stepping in to fill the void, costing households and hurting demand. On the other hand, surging global caseloads could push prices up as they prompt factories closures and keep cars, furniture, toys and other goods in short supply.

The virus is making the trajectory for economic growth less certain. Most forecasters expect the economy to expand rapidly next year but at a slower place than in 2021: Fed officials last week projected that the economy would grow by 4 per cent in 2022, roughly double what is considered typical but less than this year's 5.5 per cent growth. If the virus proves crushing, though, growth could weaken sharply early in the year.

Which force is more powerful when it comes to prices - the hit to demand caused by Omicron-tied closures and layoffs, or the continued pressure on supply chains as consumers keep buying easy chairs and yoga pants and as factories shutter - will matter hugely.

The Biden administration is trying pull what levers it can, including increasing the supply of oil and petrol and trying to keep ports open longer in an effort to clear backlogs. But much of the job of controlling inflation falls to the central bank, which is in charge of fostering full employment and stable prices. Fed officials will have to sort through conflicting evidence to decide whether the economy needs to be cooled down - and if so, by how much.

"We ended the year still on a high note - but it was a booming economy with heat," said Ms Diane Swonk, chief economist at the accounting and advisory firm Grant Thornton. "We also have this inflation."

Fed officials and most economists think price gains will slow from their current rapid pace next year. But nobody is certain how quickly and how completely that will happen, or what effect Omicron will have.

Fed officials expect inflation to ease to 2.6 per cent by the end of next year, their most recent economic forecasts showed. While that would mark an improvement, it would remain substantially above their 2 per cent goal.

Given that backdrop, central bankers are beginning to react more decisively.

Fed policymakers announced this month that they are speeding up their plans to withdraw support from the economy, and they set themselves up to potentially raise interest rates several times next year. That would make buying a car or expanding a business more expensive, making it more attractive to save and less attractive to spend, cooling off the economy and, over time, weighing on inflation.

But higher interest rates could also slow the jobs recovery as they weaken growth, denting hiring.

There are a few hopeful signs that some of the backlogs may soon improve. Shipping container costs have eased slightly from peak levels, and some automakers have worked to secure semiconductor supplies. Ms Aneta Markowska, chief financial economist at Jefferies, pointed out that the typical drop-off in consumer demand following the holidays may give beleaguered factories time to catch up.

But risks loom. Intel's CEO recently warned that chip shortages could last into 2023. The new variant could shut down factories in Asia - some important manufacturing hubs in China are already cutting activity - or further gum up domestic ports, perpetuating the problems.

"We are probably past peak supply chain chaos, but we haven't returned to supply chain normalcy," said Mr Ian Shepherdson, chief economist at Pantheon Macroeconomics.

If Omicron forces many people to revert to staying at home, consumers could keep spending on goods, extending pressure on the supply chain. Businesses are also building up vehicle fleets and ordering new equipment, keeping factories chugging.

In the job market, Omicron could prevent workers who are afraid of becoming infected, or of infecting vulnerable friends and family, from applying to open positions. That could force employers to raise wages, and they might then increase prices to cover their labour costs.

The upshot? Inflation will probably fade next year, and may have already peaked according to some measures. But it is hard to guess whether and when it will return to levels that allow consumers and policymakers to breathe easier - and Omicron is making the trajectory for the 2022 economy less clear.

"There are a lot of things happening at once that could make this complicated to understand," Ms Swonk said, noting that she will be watching incoming data on jobless claims in January for an early hint at how the new variant is affecting employment. "We just don't know yet. That's the hardest part."