Inflation Found in US Supermarkets... Variable for Next Year's Tightening Policy

Egg and Margarine Prices Soar 50% Year-on-Year
Flour and Baking Mixes Rise 24.9%

[Asia Economy Reporter Kwon Haeyoung] In the United States, prices for baking ingredients such as eggs, butter, and flour have surged, causing a spike in 'baking inflation.' Food prices have risen significantly not only for groceries but also in school cafeterias and dining out. As the upward trend in service prices, which have high downward rigidity, shows no signs of easing, expectations are growing that the Federal Reserve's (Fed) tightening stance as an 'inflation fighter' will continue into next year.

[Image source=Reuters Yonhap News]

According to major foreign media including The Wall Street Journal (WSJ) on the 28th, U.S. grocery prices rose 12% last month compared to a year earlier. This is the highest level since August 1979 (13.5%), when the second oil shock hit the world.

By item, prices of eggs and margarine jumped 50% year-on-year, while flour and baking mixes rose 24.9%. In the case of eggs, supply disruptions caused by the spread of avian influenza (AI) have pushed the price of a dozen eggs to $3.60, double the $1.82 price a year ago. The WSJ reported, "According to Labor Department statistics, eggs, margarine, and flour are among the 12 items that have increased the most over the past year," adding, "With U.S. inflation reaching its highest level in 40 years, baking a cake has become quite costly this year."

Dining out costs have risen even more. Restaurant prices for sit-down meals have surged more than 9% compared to a year ago over the past few months. Considering that the annual increase rate was 2.7% over the 20 years before the pandemic, this rise is substantial. Prices for alcoholic beverages at pubs and restaurants also jumped 7.1% in November, marking the largest increase since 1991. Prices in school cafeterias have tripled in one year, largely due to schools that provided free lunches during the early COVID-19 pandemic now starting to charge fees.

The reason why the rise in dining out costs deserves special attention is that it serves as one of the indicators to gauge the Fed's future interest rate hike policy. Fed Chair Jerome Powell said shortly after the Federal Open Market Committee (FOMC) meeting in mid-November, "There is a forecast that service inflation will not come down quickly," and added, "We will have no choice but to raise interest rates to the level we want."

In fact, U.S. service prices remain high. Last month, costs for clothing repair and rental and shoe repair soared 14.1%. Barber fees rose 6.8%, marking the largest increase since 1982. This trend is the exact opposite of the overall Consumer Price Index (CPI) growth rate, which slowed from 9.1% in June to 7.1% in November. Service prices such as dining out have strong downward rigidity once they rise, and are expected to continue to exert persistent pressure on prices. Especially, a labor market boom has led to a shortage of workers, causing wages to rise and creating a vicious cycle of increasing service prices.

The WSJ analyzed, "After the pandemic, consumer spending and government stimulus overlapped with supply chain disruptions caused by COVID-19, and this year, the Ukraine war worsened prices for energy, food, and raw materials," adding, "Labor demand outpacing supply triggered wage increases, which became another cause of inflation."

The International Monetary Fund (IMF) projected in its World Economic Outlook (WEO) released in October that U.S. inflation will reach 8.1% this year and 3.5% next year. The inflation forecast for next year was raised by 0.6 percentage points from the previous estimate. The global inflation rate for next year was revised upward by 0.8 percentage points to 6.5%, while the growth rate was lowered by 0.2 percentage points to 2.7%. The IMF stated, "Additional shocks to food and energy next year could prolong inflation," and "The possibility of a halt in Russian gas supplies to Europe remains."

In reality, although international grain prices, which surged due to distribution disruptions after the Ukraine war, are stabilizing, structural crises such as abnormal weather continue. International oil prices could also rise sharply again due to increased demand from China’s reopening of economic activities, Europe’s energy shortages, and production cuts by oil-producing countries to defend prices. In this situation, if the Fed’s strong tightening stance continues next year, there are growing concerns that the already slowing global economy could be pushed into a sharp recession.

The UK think tank Centre for Economics and Business Research (CEBR) predicted, "The war against inflation has not yet been won," and "Central banks around the world will continue efforts to reduce inflation despite economic costs, and as a result, will face meager growth rates for the next few years."

This content was produced with the assistance of AI translation services.