December’s US inflation numbers must be taken with a pinch of omicron

The omicron in the ointment.
The omicron in the ointment.
Image: Reuters
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US inflation hit a 40-year-high in December, as new data showed the Consumer Price Index rose 7% year-on-year, a rate unmatched since 1982. The spike was driven by increases in the prices of shelter, used and new vehicles, gasoline, and other consumer goods such as household furnishings, food, and apparel.

But context matters. In this case, December proved to be a whole new phase of the pandemic—one in which a new virus variant was on the loose, tripping up industries and supply chains, even as the country shunned lockdowns and consumption levels stayed high in a holiday season.

The combination of a new variant on the one hand and consumption-as-usual on the other—a recipe for higher prices—was relatively novel. During the first wave of the pandemic, in 2020, widespread lockdowns kept people at home and diminished their abilities to spend. Even during the spread of the delta variant, in March-April 2021, spending patterns were recovering, and the supply chain crisis that would tax US ports had not yet peaked.

The omicron effect on inflation

In December, though, the spread of omicron did not trigger sweeping lockdowns or restrictions. People were, in theory, still free to go out to shop, travel, and dine out—and they wanted to, particularly in the lead-up to Christmas. But on the supply side, the virus made its presence heavily felt.

Restaurants downed shutters after workers tested positive, and the cost of dining out rose 6% year-on-year. Companies supplying groceries were similarly hit. Airlines canceled thousands of flights amidst staff shortages. Car manufacturers faced fresh challenges in sourcing parts from other regions in the world, and from China in particular. Supply chain jobs now proved even harder to fill, as workers feared both sickness and arduous quarantine rules.

In other words, consumers were demanding products and services just as industries and supply chains descended into omicron chaos. In testimony to the Senate Banking Committee on Tuesday (Jan. 11), Jerome Powell, the chair of the Federal Reserve, admitted that inflation posed a “severe threat” to the US economy and that the Fed was preparing to raise interest rates to cool prices.

But he also reiterated the asynchronous gap between, on the one hand, people who were consuming avidly and, on the other, industries who were unable to satisfy every potential customer, and although he didn’t mention omicron, its effects were strongly implicit. “What we have now is a mismatch between demand and supply,” Powell said. “We have very strong demand in areas where supply is constrained, particularly around goods, particularly around things like cars.” He predicted, though, that supply chain bottlenecks would ease this year, bringing inflation down in their wake.