- [Narrator] Last year, policymakers were convinced
that inflation would be.
- Transitory. - Temporary.
- That's a transitory thing.
- [Narrator] But over a year later.
- I think I was wrong then about the path
that inflation would take.
- [Narrator] For most of 2022,
inflation has lingered above 8%,
a 40-year high.
It's affected everything from gas prices to groceries.
But why has it lasted longer than many experts expected?
There are a few key factors
that propped it up and made it tricky
to predict what comes next.
The first is consumers have more to spend.
At the beginning of the pandemic,
emergency measures from Washington,
including stimulus checks, loan pauses,
low borrowing costs and more flushed the economy with cash.
- And those resources really built up
and it was a large stockpile of dry tinder
that was ready to spend as the economy loosened up.
- [Narrator] This is the US personal saving rate.
The amount of money households have left over
after they spend and pay taxes every month.
This spike and the ones that followed contributed
to $2.3 trillion in extra savings,
which is one of the reasons consumers have continued
to spend as prices have gone up.
- There was pent-up demand.
Humans are social animals.
They wanted to go back out to restaurants,
they wanted to see their friends,
they wanted to visit families.
It resulted in more spending
but it also resulted in companies demanding higher prices.
- [Narrator] The Fed estimated that there was still a stock
of $1.7 trillion in excess savings in mid-2022.
And as consumers have continued spending,
companies have been hiring to meet that demand.
- There was just such a demand
for workers after the pandemic
that companies had a lot of openings for positions
that they just couldn't fill
and an environment of very low unemployment.
- [Narrator] Here's a chart that helps show
just how strong the job market is.
This is the number of job openings,
and this is the number of people who are unemployed.
- On the one hand, you have an excess of demand
from all the money in household bank accounts
and the other is you have a deficit of supply
from shortages of not only workers
but also goods sourced in global supply chains.
- [Narrator] To help try to fill those vacant positions,
and encourage workers to stay on,
businesses have also raised wages.
Compensation for private
and state and local government workers
has grown by 5% from last year.
But when companies raise wages,
they often raise prices to make up the difference.
- As wages go up, companies respond by raising prices.
But as prices go up, people say my cost of living
is going up, you've gotta increase my pay.
And this process starts feeding on itself.
- [Narrator] But aside from consumer spending power
and the labor market,
inflation has just been a really hard target to hit.
- It's kind of been like watching a game of Whac-A-Mole.
Every time you see inflation pop up in one area
and think you understand it,
it puts its head and down pops up in some other area.
- [Narrator] Price increases have rippled
through the economy at different times.
In 2021, prices for things like groceries, cars
and gas were pushed up by economic recovery
from the pandemic.
Then in 2022, airline tickets rose as well
as the war in Ukraine drove up the price of jet fuel.
And as some of those prices started to ease,
housing kept going up
as the economy reopened and rents increased.
- So inflation has run right through your home,
from the stuff you put in your home,
the televisions and the furniture
to the actual cost of living in the home,
from the goods sector to the services sector,
right there in your own day-to-day life.
- [Narrator] And that bouncing around
has made it harder for the Fed
to forecast how long policies need to be enacted
in order to bring inflation down.
- I just think that the inflation picture
has become more and more challenging
over the course of this year, without question.
That means that we have to have policy
being more restrictive
and that narrows the path to a soft landing.
- It's using this instrument
that hits certain sectors of the economy harder than others.
So it raises interest rates,
which raises the cost of interest
in interest-sensitive sectors,
like housing but it might not hit other parts
of the economy where inflation is acute.
- [Narrator] The International Monetary Fund says
that interest rate increases have their peak effect
on inflation after three to four years.
- Monetary policy has long and variable lags,
which is another way of saying it takes time
for these effects to work their way into the economy.
And the backdrop to the economy
is constantly changing.
That's the variable part.
So it takes time to play through
and how it plays through is unpredictable.
So the story is still unfolding.
- [Narrator] The Fed made another interest rate increase
at the beginning of November
and said that they may push interest rates higher
than originally expected.