Why U.S. officials say inflation is no longer ‘transitory’

Prices will continue to climb and U.S. officials are finally admitting it, saying this week that inflation can no longer be categorized as short-term. 

Both Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen said in interviews this week that it’s time to retire the term “transitory” when discussing the current U.S. inflation trends.

“We tend to use [transitory] to mean that it won’t leave a permanent mark in the form of higher inflation,” Fed Chairman Jerome Powell said during a congressional hearing on Tuesday. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” 

He added that while it’s difficult to predict how long the effects of supply chain issues will linger, it appears that “factors pushing inflation upward will linger well into next year.” 

“I am ready to retire the word transitory,” Yellen echoed in an interview with Reuters on Thursday. “I can agree that that hasn’t been an apt description of what we are dealing with.”

The cost of goods and services in October jumped 6.2% over the past year, with food prices up 5.3% over the last year and energy shooting up a whopping 30%, according to the latest U.S. Bureau of Labor Statistics report. That means overall inflation is running well above the Fed’s 2% goal—and has been for a while. The Consumer Price Index has been ticking up month after month since May 2020.

All of that’s to say, this is no longer a short-lived trend, something that officials like Powell and Yellen are finally admitting publicly this week after months of hedging their bets that rising inflation would start to ease off.  

Much of the current rise in costs is due to supply chain challenges and the rapid increases in demand that will likely ease as the U.S. continues to recover from the effects of the COVID-19 pandemic. There have also been increases in energy and food prices due to transportation and supply-chain issues, as well as Hurricane Ida’s effect on energy prices, says Gus Faucher, PNC’s chief economist. 

Wage growth has been less important as a source of inflation this year, but that may start to shift amid persistent staffing shortages. It’s important to note that the labor force is smaller than it was before the pandemic, and demand for labor is strong as the economy continues to recover, Faucher tells Fortune. This has led employers to raise wages, particularly for workers at the lower end of the wage scale, including in the restaurants and retail sectors. 

“These higher labor costs will add to broad inflationary pressures in 2022,” Faucher says.  

And that may already be taking shape. “Wages are up, especially for hardworking Americans often ignored in the past, and past recoveries,” President Joe Biden announced Friday. “Workers in transportation and warehouses have seen their wages go up approximately 10%. Workers in hotels and restaurants have seen their wages go up to 13% this year.”

Overall, the average hourly wage in November was 25% higher compared to the same point last year, according to data provided to Fortune from Randstad North America.

Labor is a “very sticky” cost factor, says Michael Swanson, chief agricultural economist at Wells Fargo. “It's really hard to tell somebody, ‘Hey, I'm going to bump your paycheck up to $18 an hour, and then when things kind of settle down, you're like, I'm gonna kick you back to $15,” he recently told Fortune

“Higher wages are something that once it gets built in, it's kind of permanent,” Swanson says. 

U.S. wage increases may slow in the future, but once employers start paying a lot more for labor, it's gonna take a while to normalize. To keep pace, companies either have to automate more of the process or pay for the labor and pass along the cost to consumers. 

Overall, Faucher predicts inflation will be lower in 2022 as reopening-specific inflation fade, but expects it to also be more broad-based, affecting a wider variety of goods and especially services.

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