Stubbornly high inflation erodes Americans' income, casts shadow over growth prospects

WASHINGTON, Feb. 28 (Xinhua) -- Stubbornly high inflation in the United States is eroding businesses' profit margins and households' purchasing power, casting shadow over growth prospects.

Personal consumption expenditures (PCE), the U.S. Federal Reserve's preferred inflation gauge, rose 6.1 percent annually in January, the fastest annual pace in four decades, another key economic indicator to warrant the Fed's expected rate hike at its March policy meeting.

COSTS UP, MARGINS DOWN

As inflation remains persistently high, American businesses, particularly small ones, are seeing their costs picking up and finding it more difficult to manage their businesses.

"As costs go up, we lose margin," Jamie Fiocco, owner of Flyleaf Books, a bookstore in North Carolina, told Xinhua, noting that in the book industry, inflation poses a big problem in that prices are pre-printed on books and thus cannot be changed by booksellers.

Also the president of the American Booksellers Association, which represents over 2,000 independent brick-and-mortar booksellers, Fiocco does not expect inflation to be a large issue overall, but if publishers start raising their standard paperback and hardcover prices, "that may be a big problem."

Her concerns are echoed by many business owners, who are facing higher operation costs amid continued supply chain bottlenecks and persistent labor shortages.

A total of 80 percent companies in a survey released in December by the Federal Reserve Bank of Richmond handled rising costs by "passing on at least some of these cost increases to customers through higher prices."

The firms in the survey also reported absorbing cost increases, including reducing margins, reducing costs in other areas, eliminating or substituting product offerings, adding contingency clauses into contracts, and turning down work.

The U.S. consumer sentiment index fell from 67.2 in January to 61.7 in the first half of February, the lowest since October 2011, according to a survey released by the University of Michigan earlier this month.

"The recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government's economic policies, and the least favorable long-term economic outlook in a decade," Richard Curtin, chief economist of the survey, said in a statement.

A separate report in February from the Conference Board showed that "the proportion of consumers planning to purchase homes, automobiles, major appliances, and vacations over the next six months all fell," and noted that confidence and consumer spending would continue to "face headwinds" from rising prices in the coming months.

RATE HIKES ON THE WAY

Against the backdrop of surging inflation, the Fed signaled last month that it was ready to begin a series of interest-rate hikes in March as it exited from the ultra-loose monetary policy enacted at the start of the pandemic.

According to the CME Group's Fedwatch tool, investors are betting that there is a 100-percent chance of a rate hike at the Fed's March meeting. The only question is how big the rate hike is going to be.

New York Fed President John Williams said last week that there was little need for the central bank to begin its interest rate hiking plan with a big move, with no compelling argument for a 50-basis-point hike, at the next policy meeting in March.

Federal Reserve Governor Christopher Waller, however, said Thursday he was willing to support a half-point interest rate hike at the central bank's next meeting if upcoming data indicated that the economy "was still running exceedingly hot."

For Tom Waters, a seventh-generation farmer in Orrick, Missouri, rising interest rates are "the biggest concern."

"Most farmers work with an operating loan for crop inputs. Higher interest rate can stress farmers," Waters told Xinhua, adding that higher input costs are also an issue.

Waters has been locking in some selling prices for grain at higher levels, but the Ukraine crisis "creates lots of questions and concerns" about both crop prices and crop input prices, he said.

INFLATION PERSISTING

The consumer price index (CPI) in January rose 7.5 percent from a year earlier, the fastest annual pace in almost 40 years, according to data released by the U.S. Labor Department earlier this month.

"In January, a further sizable rise in the CPI indicated that price pressures had not yet begun to abate," the Fed said Friday in its semi-annual monetary policy report to the Congress.

"In the period ahead, the large price changes in goods may ease once supply chain disruptions finally resolve, but, if labor shortages continue and wages rise faster than productivity in a broad-based way, inflation pressures may persist and continue to broaden out," the Fed said.

The central bank also noted that recent geopolitical tensions between Russia and Ukraine are "a source of uncertainty" in global financial and commodity markets, and they have contributed to higher energy prices.

Sarah House, senior economist at the Wells Fargo Securities, said in an analysis Friday that "another leg up in commodity prices" following the Russia-Ukraine conflict alongside the broad strength in January's consumer price data had led the team to once again raise their estimates for inflation this year.

"While it still seems plausible that inflation will peak on a year-over-year basis in February, the descent looks set to be much slower-going," House said. "The degree of inflation will continue to keep pressure on the Fed to tighten policy significantly this year."