Rapid Inflation Stokes Unease From Wall Street to Washington

Most economists still believe inflation will cool by year’s end, as automobile prices climb at a more moderate pace and as supply chain problems hopefully ease. But high and widespread price increases portend trouble for a White House that is struggling to convince voters that the economy is strong, and for a Fed that looks increasingly at risk of falling behind the curve.

“It was more than expected, and it was broad-based,” said Priya Misra, head of global rates strategy at TD Securities, adding that she now expects price gains to slow less drastically this year. “We’ve gotten used to these big headline numbers, but every aspect of ‘transitory’ you can push back against now.”

Economists thought price gains would fade quickly in 2021 — making now-infamous predictions that inflation would prove “transitory” — only to have those projections proved wrong time and again as booming consumer demand for goods collided with roiled global supply chains that could not ramp up production fast enough.

Lately, it is more than just shortages of goods at play. Price gains are increasingly hitting consumers in hard-to-avoid ways as they show up in necessities: January’s inflation reading was driven by food, electricity and shelter costs, the Bureau of Labor Statistics said.

High and broadening inflation has become a political liability for President Biden, as rising prices eat away at household paychecks and detract from a strong labor market with solid wage growth. That has left consumers feeling pessimistic and has all but killed Mr. Biden’s chance to pass a sweeping climate and social policy bill given lawmaker concerns about rising prices.

Ryan Sweet, an economist at Moody’s Analytics, estimated that inflation was costing the average household $276 a month, compared with a more normal rate of inflation, which had been hovering just around 2 percent before the pandemic.

“While today is a reminder that Americans’ budgets are being stretched in ways that create real stress at the kitchen table, there are also signs that we will make it through this challenge,” Mr. Biden said in a statement. He emphasized that wages grew more quickly than prices last month — though in general they have not kept up with price gains over the past year.

The White House has introduced policies that might help to ease inflation slightly — discussing plans to help place military veterans into the short-staffed trucking industry, for instance — but the Fed is primarily in charge of slowing down demand to keep prices under control.

Fed officials have already shifted away from trying to foster a quick economic rebound and toward bringing inflation down.

After Thursday’s report, investors expected the Fed to withdraw economic support even more quickly. Markets braced for a half-percentage-point increase in the federal funds rate at the central bank’s meeting next month — double the usual increment.

The inflation reading sent stocks down and government bond yields up. The S&P 500 dropped 1.8 percent, while the Nasdaq composite fell 2.1 percent. The yield on 10-year U.S. Treasury notes rose 0.1 percentage points, to about 2.03 percent, the highest level since November 2019.

James Bullard, the president of the Federal Reserve Bank of St. Louis, fretted about the January inflation report in an interview with Bloomberg News and suggested that policymakers should be open to both a bigger-than-normal rate increase and to increasing rates in between officially scheduled meetings.

“You have got the highest inflation in 40 years, and I think we are going to have to be far more nimble and far more reactive to data,” said Mr. Bullard, who has at times espoused bold stances that are not followed by his policymaking colleagues.

The Fed generally moves borrowing costs in between meetings only at stressed moments and in emergencies, as was the case when it cut rates to zero between planned gatherings in March 2020.

Inflation is abnormally high relative to the central bank’s goal: The Fed aims for 2 percent inflation on average over time, defining that target using a different but related inflation index that is also sharply elevated.

And it increasingly appears to be driven less by the pandemic and more by a strong economy. Price increases in 2021 came heavily from roiled supply chains that sent new and used car prices and furniture costs up sharply. Those continue to be a big factor elevating overall inflation, but other areas are also fueling the rapid rise.

Rent of a primary residence, which counts for a big chunk of overall inflation and tends to respond more to economic conditions than to one-off trends, climbed 0.5 percent in January from the prior month, a slight acceleration. Other shelter costs rose at a steady but notable pace.

“Low vacancies and the end of rent moratoriums are expected to continue to push rents higher in the year ahead,” Diane Swonk, chief economist at Grant Thornton, wrote in a note after the release.

As costs for shelter and other services pick up, policymakers are hoping that supply chains will start to catch up. That could allow prices for goods to moderate or even fall — taking pressure off overall inflation.

It is not clear, however, how quickly that is going to happen. Protests in Canada have clogged a key trucking route and disrupted parts delivery to car factories, the latest issues in the already unsettled automobile sector. Even if those are not especially disruptive, some industry experts don’t expect a big drop in automobile prices this year, just slower gains.

“The growth rate of vehicle prices — these crazy numbers we saw in 2021 — should start to slow,” said Charlie Chesbrough, senior economist at Cox Automotive. But demand remains robust, and “we’re so far behind on the manufacturing side.”

Still, the Fed’s policy response could help inflation to moderate. Consumers have also been buying goods at an unusually rapid clip, but recent data suggests they may be cutting back their spending. Economists expect that trend to continue as the pandemic wanes, which could give supply room to catch up.

Some even worry that the Fed could hit the economic brakes just as price gains and economic growth slow on their own. The Fed has in the past spurred recessions by using its blunt tool — an ability to choke off demand — to guide the economy.

“My concern is that they overdo it,” Mr. Sweet, of Moody’s Analytics, said before the report. “This is not going to be easy.”

But emerging trends could keep inflation high.

Jobs data released last week showed that average hourly earnings climbed rapidly — and much more than economists expected, though still not quite enough to keep up with rapid inflation. Rising pay could lift prices if companies pass those costs along to customers to protect their own profit margins.

For now, corporate profits look strong and productivity is high, which may give companies room to absorb bigger wage bills. And if pay continues to rise less quickly than prices, it may weigh on demand as consumers struggle with costs.

Daniel Ashley, 46, a paralegal in Mount Kisco, N.Y., said his weekly grocery costs had climbed about 20 percent in the last few months, even though he typically buys the same products. He said nearly everything at the store seemed to have become more expensive: A large box of Cheerios now costs him up to $6, an increase of about a dollar from six months ago.

Mr. Ashley said the rise in food prices would be more manageable if he was not also dealing with higher costs for gas and electricity.

“I have to deal with rising prices for gas. I just found out recently my electric bill is going up,” he said. “Everything is getting more expensive.”

Teneshia Moore, 51, an eighth-grade teacher living in Fraser, Mich., said she had recently stopped buying chicken because it had become too costly. She has been relying on food that she has stored in her freezer and pantry, but she worried that she would have to spend more after depleting her stockpile.

“It’s affecting my quality of life,” Ms. Moore said. “I don’t like it, but there’s nothing I can do about it.”