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Inflation looks to be around for a while

Inflation looks to be around for a while

Inflation is back, and like a boorish party guest, its going to last longer than wed like.

Consumer prices rose 5.4 percent in September, the labor department said on Wednesday, its largest year-over-year increase in the inflation measure since July 2008. The price rise increases the likelihood that the Federal Reserve will act soon to tighten credit pulling away the punchbowl, to use an old expression for the central banks duty to keep prices under control.

Behind the price rises were higher food, energy, and housing costs items that arent easy to cut back on and are unlikely to get cheaper any time soon. Even removing food and energy, which are more volatile than other goods and services in the index, prices rose a massive 4% from September 2020.

The Social Security Administration said on Wednesday that the higher rate of inflation over the past year will result in a 5,9 percent increase in Social Insurance benefits, the most recent increase for 39 years.

Its no wonder that inflation is rising as the economy recovers from the epidemic. Economists warned that prices would rise rapidly as consumers, fueled by government stimulus dollars, increased spending; businesses passed along the cost of higher wages to attract workers; and COVID-induced disruptions to distribution networks left many products in short supply, leading to price increases.

But forecasters are now predicting that prices will stay high much longer than they had originally predicted likely through most of 2022 rather than retreating by the end of this year as they thought a few months ago.

Supply chain bottlenecks have been more problematic and persistent than anticipated, not just here but also around the globe, says Ken Matheny, IHS Markit's executive director of US economics.

President Biden on Wednesday sought to address those bottlenecks and quiet Republican quips of Bidenflation that may weigh on his political fortunes, and those of congressional Democrats.

After weeks of negotiations, Biden said the Port of Los Angeles will be open 24/7, seven days a week, to eliminate lingering cargo ships waiting to unload goods, joining the 24/7 operations at the adjacent Port Of Long Beach. 40 percent of shipping containers entering the United States arrive at these ports.

Todays announcement has the potential to be a game changer, Biden said at the White House.

He also announced commitments from Walmart, FedEx, and UPS to increase their operations to move more goods at night, as well as urged other businesses to do the same.

Biden set up a Supply Chain Disruptions Task Force in June to address distribution issues and promised on Wednesday to provide federal assistance if needed to solve supply chain issues. He further emphasized the need for Congress to pass a pending $1 trillion bipartisan infrastructure bill, which includes major investments in port improvements.

Even if the Biden effort is successful, it will take time for the delivery of goods to accelerate to prepandemic speeds. And as COVID-19 delays production and shipping in key exporting countries like China and Vietnam, product shortages will continue.

April Gabriel, the owner of Boston General Store in Dedham, who has been forced to order goods two months ahead of schedule just to make sure she has goods to sell, is a frustrated businessperson.

I just had to take out a little bit more of credit to get inventory and stock up earlier than I normally do, she added.

Shes also having a hard time finding workers: Hiring has been difficult. We had to raise wages for most of our positions. Gabriel stated, A lot more."

Boston General Store and many other businesses are raising prices to offset rising employment and product costs, and thats taking a toll on household finances. Consider these month-over-month price increases: gasoline, up 42 percent, used cars, down 24 percent; and meat, poultry, fish, and eggs, rising 10.5%.

Since the outbreak, the residential home market has been hot, but rents are now rising as well. Analysts said housing expenditures, which account for more than 30 percent of last month's CPI increases, were less likely to drop quickly than the price of eggs or gas, who now averages $3.29 a gallon.

Since 1990, inflation hasnt been steady above 4 percent. The larger worry had been deflation, a cycle of rising prices and wages that usually goes hand in hand with an economic downturn. Until recently, the Federal Reserve had lamented its inability to bring inflation up to its long-term goal of 2 percent.

But with inflation likely to last longer than first thought, the Federal Reserve may soon begin withdrawing some of the monetary stimulus it unleashed during the epidemic. Fed watchers speculate that the central bank may begin cutting its purchases of government bonds and mortgage securities which it had used to keep money flowing into the economy - as early as next month, and could complete them entirely by March.

Rising interest rates and rising inflation are two variables that keep investors up at night. Wall Street, on the other hand, didnt freak out over the inflation report. After an initial decline, stocks ended Wednesdays trading with little change. The yield on the 10-year Treasury note, a benchmark for interest rates, actually fell.

The lack of immediate concern reflects optimism that inflation wont spiral out of control, according to Mark Zandi, Moodys Analytics chief economist.

Expectations for inflation in the future are still reasonable. Thats because when consumers and businesses anticipate higher inflation, they take measures that compound the problem. Businesses react by raising prices on their goods and services, and workers seek higher wages. Thus, may begin an inflationary cycle that may be difficult to stop without painful increases in interest rates like we saw in the early 1980s, after President Gerald Fords Whip inflation now campaign failed.

Todays fall in long-term rates suggests that investors are optimistic about inflation prospects, Zandi said. Id keep those WIN buttons in the attic.

Jim Puzzanghera of the Globe staff and Globe correspondent Angela Yang contributed to this report.

Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.

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