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Economists Predict Highest Inflation Rate In 40 Years Should Ease Later In 2022

PITTSBURGH (KDKA) -- Nobody likes rising prices, but as Americans got back to work last year and the recovery began, the cost of almost everything has gone up, too.

The inflation rate has now hit its highest level in nearly 40 years.

Since 1992, the annual inflation rate has been around 3 percent, between one and 4 percent each year. But in 2021 inflation hit 7 percent, the highest since Ronald Reagan was president. And while economists think it will come down this year, inflation will take a toll out of everyone's wallet.

The consumer price index – or CPI – is the government's way to calculate inflation.

"You can think of it simply as the average prices of things that people typically buy, the typical household, so it includes things like the price of gasoline, the price of housing, the price of food," says Prof. Antony Davies, an economist at Duquesne University.

The CPI's 7 percent inflation rate was fueled by energy costs that jumped over 29 percent last year, while food prices rose 6 percent.

Another huge contributor – the price of vehicles, including used cars, says Davies.

"What's driving this largely is the price of vehicles. They're up like 40 percent since last year," Davies told KDKA money editor Jon Delano.

Most economists like Omair Sharif, founder of Inflation Insights, say the pandemic is largely to blame, creating supply chain problems overseas and at ports that drive up prices. And then there's the demand side.

"Right now, not as many people are flying as we normally see. Not as many people are going out to restaurants due to COVID. What they're spending their money on is durable goods. They're buying furniture. They're buying TVs, things of that nature. And that's also sort of driving up the costs," says Sharif.

Although the 2021 inflation rate is high, the trend may be better than it feels. The December monthly inflation rate at 0.5 percent is down from October's rate of 0.9 percent. So what will 2022 look like?

"The next few months will stay around 7 percent inflation, and by the middle of the year, you should hopefully get down to 4 and 4.5 percent. And by the end of the year, I expect we should be closer to about 3 percent," says Sharif.

Whatever the inflation rate, economists say don't count on quick wage increases to offset the price rise.

"Wages will rise with inflation, but they tend to rise in a lagged fashion," says Davies. "That is, we'll get inflation now and you feel that in your pocketbook because things are more expensive, and you won't get the raise until next year."

And watch the Federal Reserve. Economists expect the Fed to raise interest rates at least a little bit to combat inflation, adding to the cost of a credit card or consumer loan.

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