The chart below focuses on the rate of inflation between October 2020 and October 2021. Things changed in 2021. In 2021, inflation began the year at only 1.4%, but by October inflation jumped to 6.2%, a 4.8% increase. The effect of COVID on the economy created a collage of factors that contributed to a highly unusual jump in inflation. The Bureau of Labor Statistics provides monthly data since 1948 on the 12-month percent change in the rate of inflation. The 4.8% increase that occurred between January and October of 2021 was the second largest increase in inflation that occurred in any year since 1948. The oil embargo and energy crisis in 1973 contributed to the largest increase in inflation in any year, as inflation rose from 3.6% to 8.9%, a jump of 5.3%. Both 1973 and 2021 featured “supply shocks” to the U.S. economy. Energy prices rose sharply in each case, but supply chain interruptions extended beyond energy in 2021. The novelty for the U.S. economy in 2021 – inflation was caused by changes in both supply and demand.
12-month Percent Change in CPI for all Urban Consumers, October 2020 – October 2021 Source: Bureau of Labor Statistics
There is no question that the short-term pain created by the significant increase in inflation is real to U.S. consumers. Although the effect on consumers has been painful, corporate profits have been at record levels, indicating that increased corporate costs have generally been more than offset by price increases passed through to consumers. Second quarter 2021 corporate profits reached a record $2.7 trillion, surpassing the previous record of $2.4 trillion which was set in the first quarter of 2021. Corporate profits have increased approximately 30% from their pre-COVID highs in 2018. Inflation Factors A myriad of factors contributed to the recent spike in U.S. inflation. COVID impacted the two broad factors that affect prices – supply and demand. Price increases have been broad, affecting a wide variety of consumer products. Listed below are the price increases for selected product categories that had some of the largest price increases for the 12 months ending October 2021.
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Center for Business and Economic Insight
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