Recent services inflation presents new challenge for Fed

There has been hope in economic and political circles that the inflation it will cool off once Americans return to spending more money on restaurants, hotels and other service industries, and less on things that have been hit by the global supply chain crisis, such as clothing and gadgets.

That thesis is starting to lose steam.

On the one hand, goods inflation continues to rise. It reached 12.3% annually in January, the most since 1980, according to a report released Thursday by the Labor Department. At the same time, services inflation has also started to pick up sharply, rising at an annual rate of 4.6% in January, the most in 31 years.

Soaring costs for services like health insurance and housing spell trouble for the officials in charge of the US economy, making it difficult for the Federal Reserve and the president. Joe Biden to argue that inflation will cool once logistics bottlenecks such as port congestion are removed.

“With COVID cases in rapid decline and wages rising as strongly as inflation, inflationary pressures in services are widening beyond the key housing component,” economists at Wells Fargo & Co. wrote in a note. Co. Sarah House and Michael Pugliese. “With services inflation steadily on the rise, a much steeper slowdown in commodity inflation will be needed to bring inflation down.”

‘Beyond time’

The Fed, which is preparing to raise interest rates next month, is already being criticized for moving too slowly to rein in inflation. As for Biden, who faces a struggle to hold on to his slim congressional majorities in November’s midterm elections, many of his critics—and some members of his own party—blame price overheating on US$1.9 trillion stimulus package that his Administration approved early last year.

That is already making it difficult for the president to push through additional spending measures in his broader economic program.

The acceleration in service prices includes some of the items that figure prominently in household budgets, making them politically sensitive.

Health insurance costs increased 2.7% from December, the largest increase in history. Primary residence rent was up 0.5%, the most since May 2001. While hotel costs fell, airfares rose despite record COVID-19 cases.