Consumer prices in the United States rose 7% in December last year compared to the previous year, this being the highest inflation rate since 1982, the U.S. Bureau of Labor Statistics reported recently. The trend may have a severe impact on emerging markets that could experience a weakening of their currencies against the US dollar, experts have warned.
Prices continued to rise throughout the U.S. economy in 2021, with an average of 6.8% in December, the highest increase since June 1982. The government has reported that petrol prices rose by 58% last year, the cost of a new vehicle by 11%, furniture, and bedding by almost 12%, meat, poultry, and fish by 13%, and fast food and casual dining outlets increased their prices by almost 8%.
Spending by American consumers, which accounts for more than two-thirds of U.S. economic activity, fell 0.6% in December after gaining 0.4% in November.
See also: American consumerism and its role in the supply chain crisis
For consumers, inflation is more of a daily fact than any other aspect of the U.S. economy that has recovered relatively quickly since the coronavirus pandemic first hit the United States in March 2020, stated the Voice of America (VoA) media portal. The U.S. economy had a record 6.4 million jobs available last year while the unemployment rate dropped from 6.3% in January to 3.9% in December and hourly wages for basic workers rose by 5.8%. Government benefits offered to all but the richest American households helped many families but consumer spending rose significantly.
Analysts say that this evolution has been influenced by a coronavirus-related supply shortage causing prices to rise throughout the year for high-value items such as cars and furniture but more importantly for essentials such as food and gasoline. The dizzying rise in coronavirus infections caused by the Omicron variant has slowed the recovery of supply chains with workers often calling in sick. These and other worsening constraints have kept inflation high.
The Federal Reserve signaled new efforts to control inflation by ending direct financial support for the economy in March this year, which is earlier than originally planned, and to increase the benchmark interest rate that influences borrowing costs for businesses and consumers, said VoA. The Chairman of the Federal Reserve, Jerome Powell, told a congressional committee that lowering prices to more stable levels was key to ensuring lasting recovery from the pandemic.
As mentioned on the IMFBlog, the overall U.S. wage inflation and continued supply bottlenecks could cause prices to rise higher than expected and may fuel more rapid inflation. The early rate increases by the Federal Reserve could shake financial markets and tighten financial conditions globally. These trends could lead to a slowdown in the U.S. demand and trade, to capital outflows, and to currency depreciation in emerging markets.
The impact of the Federal Reserve’s actions in this situation could be severe for vulnerable countries. In recent months, emerging markets with high public and private debt and foreign exchange exposure have already seen considerable movements of their currencies against the U.S. dollar. These increased vulnerabilities could create an adverse setback for such economies, as the IMF pointed out in its October release of the World Economic Outlook and Global Financial Stability Report.
While the global recovery is projected to continue during this and next year, the risks to growth remain elevated by the stubbornly resurgent pandemic. If this coincides with the Reserve’s actions, emerging economies should prepare for potential bouts of economic turbulence, concludes the IMFBlog article.
