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Prices climbed 7.5% in January compared with last year, continuing inflation’s fastest pace in 40 years

WASHINGTON — Prices continued their upward march in January, rising at an annual rate of 7.5 percent, the fastest pace in 40 years, as pandemic inflation continues to defy expectations, climbing faster and lasting longer than nearly anyone would have guessed.

Inflation had been expected to climb relative to last January, when the economy reeled from a winter coronavirus surge before widespread vaccines, as well as the cumulative price increases of a chaotic 2021. But Thursday’s release from the Bureau of Labor Statistics also hit new and surprising high notes — electricity bills saw their fastest monthly increase in 16 years, and a rapid rise in the cost of baked goods, including cupcakes and cookies, led most food prices higher.

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The January inflation report reflects an economy still wracked by virus variants and supply chain upheaval, a stark contrast to the promises from the White House, Federal Reserve, and economists that 2022 would ring in a new era of normalcy, throwing off the shackles of transient price gains.

However, as the Omicron variant subsides and vaccination rates rise, the hope is inflation will begin to drift downward. Many economists and business leaders predict price growth will peak in the next few months and inflation will begin what could be a long descent back to normal, assuming new variants of the coronavirus don’t jolt recovery’s overall trajectory.

“Inflation is still hot, and obviously uncomfortably high, but it’s at its peak, and as the pandemic winds down, as supply chains iron themselves out, inflation will moderate,” said Mark Zandi, chief economist at Moody’s Analytics.

Zandi said “it’s not going to be a straight line back” to more sustainable levels of inflation. But his prediction is that “each new wave is less disruptive than the previous one, and as that continues, it’s very encouraging.”

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Annual inflation numbers are likely to slow in coming months. That’s in part because the yearly comparisons will no longer include the effect of all the supply-chain disruptions and massive stimulus of early 2021. Still, monthly price growth remains unsustainably high — prices jumped 0.6 percent from December to January — though many hope that the Fed’s plans to raise interest rates in March could begin to cool prices down.

In the short term, companies see room to charge more. Colgate-Palmolive, which sells toothpaste, pet food, and more, recently announced price hikes to cover soaring costs.

Chief executive Noel Wallace said on a recent earnings call he expected the price of raw materials to peak in the first three months of the year, and that the company would be able to increase profits later in the year as recent price hikes took effect and raw-material costs began to fall. Because prices are rising everywhere, companies can charge more without worrying that customers will switch to a cheaper competitor.

“I’m worried,” said Diane Swonk, chief economist at Grant Thornton. She agrees inflation could slow in the next few months but warns that it might be difficult to bring price growth down to pre-pandemic levels.

“The Fed is counting on inflation abating somewhat on its own,” Swonk said. “The problem is that even as inflation abates, it may not cool enough not to burn. Some of the inflation we are seeing is becoming more entrenched in the service sector. There is no playbook for derailing inflation in this environment.”

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Increases in the cost of food, electricity, and shelter helped drive inflation higher in January with household furnishings, clothing, and medical care becoming costlier, while used-car costs continued to spiral, albeit at a slower pace than in prior months.

Despite inflation, there are signs that strong wage growth and generous federal aid has helped workers stay ahead of rising prices since the pandemic began. And while workers have fallen behind in recent months, Bernard Baumohl chief global economist of the Economic Outlook Group, expects them to come out ahead again as inflation falls.

“It’s very likely that the prices will come down faster than wages,” Baumhohl said. “And what that means, of course, is that companies will suffer narrower profit margins than they did last year last year.”

As inflation spread throughout the economy, several categories posted their largest monthly price increases ever, including tires, vending machines, frozen foods, and a baked goods category that includes cakes, cupcakes, and cookies.

Rent costs jumped again in January, climbing at a slightly faster pace than the previous two months. Economists have been especially worried about rising home and rent costs, which can get locked in through long-term contracts and may not improve after supply chains clear up.

Sharp price growth has undermined an otherwise robust recovery. Even after accounting for inflation, the economy in 2021 recorded its fastest growth since 1984. Over the past 12 months, the US economy has added nearly 7 million jobs, and average hourly earnings have climbed 5.7 percent. The overall economy has shown relative resilience to new waves of the coronavirus, and stocks have bounced back from their volatile start to 2022.

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Yet high inflation has left an indelible mark on the economy, including the highest price increases for housing, food, and energy that many workers have ever seen. And questions loom about how or whether policymakers will be able to rein prices back in without slowing the recovery or even causing another recession. The answers will have enormous implications for policymakers at the Federal Reserve and in the Biden administration.

The White House has been touting its actions to lower prices, including targeting corporate consolidation to help create product markets that are more competitive. On Thursday, President Biden pointed to the economy’s bright spots — historic economic growth, a drop in weekly unemployment claims, wage increases — as successes amid such high inflation.

“Americans finding better jobs, better wages, and better benefits, along with the fastest economic growth in decades,” Biden said in a statement. “On higher prices, we have been using every tool at our disposal, and while today is a reminder that Americans’ budgets are being stretched in ways that create real stress at the kitchen table, there are also signs that we will make it through this challenge.”

But inflation has proved a blistering political handicap for Biden and a litmus test for how many Americans judge the economy. Republicans largely blame Democrats’ $1.9 trillion American Rescue Plan for overheating the economy, and the GOP is set to hammer on inflation going into the midterm elections this fall.

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“Joe Biden’s economy has Americans drowning in record-high inflation,” said Senator John Barrasso, a Wyoming Republican. “People in Wyoming are now paying sky-high prices for gas, groceries, heating bills, and rent. As a result, they are having to change how they live while Democrat-driven inflation keeps eating away at their paychecks.”

All signs suggest that the Federal Reserve, which is in charge of keeping prices stable, will raise interest rates at its next policy meeting in March. Higher interest rates make it more expensive for households and businesses to borrow money, which slows spending and can cool off a hot economy and curb price growth.

Momentum in the job market, combined with soaring inflation, has pushed Fed officials to suggest they plan to raise interest rates higher and faster than officials previously anticipated. The Fed is expected to end its sprawling asset purchase program next month and raise rates multiple times in 2022, with some analysts predicting as many as five hikes.

Fed officials still say they expect inflation will fall later this year, especially if supply chains clear their backlogs and consumer demand eases to more normal levels.