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In 2022, inflation in the US has been rising and staying at historically high levels for a long time, disrupting people's normal lives and the economic order. The Federal Reserve has aggressively raised interest rates since March in an effort to curb the highest inflation in decades, which has also cast a shadow over the U.S. economic outlook.

Inflation

"Inflation" is the most important keyword for the U.S. economy in 2022. Us consumer prices soared in the first half of this year, pushing up prices across the board for staples from petrol to meat, eggs and milk. In the second half of the year, as the Federal Reserve continued to raise interest rates and supply chain bottlenecks gradually improved, CPI growth slowed down month-on-month, but still increased significantly year-on-year, especially the core CPI remained high, highlighting that high inflation may haunt the US economy for a long time.

High inflation has become the main theme of the US economy since the second half of last year due to the impact of the COVID-19 pandemic. After the Ukraine crisis escalated in February, Western countries led by the United States imposed massive economic sanctions on Russia, sending global oil prices soaring.

The U.S. economy is suffering. The CPI rose 9.1 percent in June, the highest since November 1981. That month, energy prices jumped 41.6 percent from a year earlier. Food prices rose 10.4 per cent from a year earlier, the highest since February 1981. The personal consumption expenditures price index, watched by the Federal Reserve, rose 6.8 percent in June, the biggest year-over-year increase since 1982.

Us inflation picked up slightly in the second half of the year. But notably, excluding volatile food and energy prices, core CPI rose 0.3 per cent month-on-month and 6.3 per cent year-on-year. In particular, housing costs remain high and continue to rise, indicating that price pressures have spread from goods to labor-intensive services such as housing and health care. Analysts said it would be difficult to reverse the momentum of US inflation in the short term and that inflation would remain above the Fed's 2 per cent long-term inflation target for some time.

Soaring inflation and interest rates have swelled household debt. Us household debt surged by $351bn in the third quarter, the biggest increase since 2007, according to the Federal Reserve. Economists at the New York Fed argue that rising household debt reflects high prices. As household debt has risen, so have defaults.

Interest rate hike

Inflation continues to be "hot" forcing the Federal Reserve emergency "fire". Since March, the Fed has raised interest rates seven times in a row, including four in a row by 75 basis points. The Fed funds rate has risen from near zero to between 4.25 per cent and 4.50 per cent in less than a year, marking the Fed's most aggressive rate rise since it battled high inflation in the early 1980s.

Federal Reserve Chairman Jerome Powell said after his last monetary policy meeting of the year that the full effects of the rapid tightening of monetary policy so far "have not been felt" and the Fed still has "a lot of work to do." Fed officials continue to see inflation risks as skewed to the upside and expect it will be appropriate to continue raising interest rates.

The Federal Reserve was widely criticized for being slow to act when the inflation problem first emerged, and its aggressive interest rate hike to "correct" the problem greatly disrupted the global economy and financial markets. Janet Yellen, the US Treasury Secretary, admitted recently that concentrated macroeconomic tightening in advanced economies, including the US, to restore price stability could have a spillover effect, with emerging market and developing economies hit hardest.

The current bout of high inflation in the global economy was initially caused by excessive demand and supply chain disruptions rather than a wage and price spiral, the United Nations Conference on Trade and Development said in a recent report. As a result, Fed monetary tightening may not solve such inflation problems at all.

Decline

So far, the Fed's massive rate hikes have not been effective in reducing inflation momentum, but have been a hindrance to domestic economic growth. According to the Federal Reserve's survey of the National Economic Situation, prices continued to rise in the United States at the end of November and the pace of economic growth had slowed.

The report showed that rising interest rates and high inflation continued to weigh on economic activity, with districts such as New York and Kansas City already seeing small contractions. Looking ahead, jurisdictions generally felt that uncertainty about the economic outlook had increased and pessimism about the economic outlook had increased.

Harvard economics professor Gabriel Khodorov-Reich says a U.S. recession is already on the horizon. It's just a question of how big. Jpmorgan Chase CEO Jamie Dimon says high inflation and Fed rate hikes are "eating away at everything." As the dollar strengthens, the price of energy products such as oil will continue to rise, "likely derailing the [US] economy and triggering a mild or even severe recession".

Economists' consensus estimate of a recession in the coming year rose to 65% from 60% in October, according to a Bloomberg survey released in November. The personal consumption expenditures price index is likely to rise 3.7 percent in the first half of 2023, well above the Fed's 2 percent long-term inflation target.

The impact of the US economy and related policies on the global economy continues to spill over. In its report, the United Nations Conference on Trade and Development warned of rising borrowing costs for businesses as major central banks, led by the United States, continue to raise interest rates and sell assets. Given the high leverage of non-financial companies, non-performing loans could rise sharply and trigger a wave of bankruptcies. The report urged advanced economies to change the direction of monetary and fiscal policies to prevent the global economy from suffering worse damage than the 2008 international financial crisis and the COVID-19 pandemic in 2020.