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Consumers brace for high prices as Fed projects inflation to last longer than expected

FILE - In this April 29, 2020 file photo, a shopper wears a mask as she walks through the meat products at a grocery store in Dallas.  (AP Photo/LM Otero)
FILE - In this April 29, 2020 file photo, a shopper wears a mask as she walks through the meat products at a grocery store in Dallas. (AP Photo/LM Otero)
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The Federal Reserve signaled concerns about rising inflation Wednesday, after months of downplaying the risks.

The Fed adjusted its core inflation projection up to 3.7% from 3% in June. Factoring in the rising costs of food and energy, the central bank projected overall inflation could hit 4.2% this year.

In response to these pressures, the Fed said it plans to taper stimulus measures and raise interest rates earlier than expected. The central bank said it could cut back its $120 billion monthly bond purchases beginning in November and an interest rate hike could come in 2022, unless inflation persists.

The announcement was a tacit admission that rising prices were less "transitory" than Fed Chair Jerome Powell had long argued.

Members of the Fed and White House economists claimed the surge of inflation was the result of the base effect, that prices only appeared to be rising after a precipitous collapse at the beginning of the pandemic. Others estimated supply chain disruptions would resolve more quickly and employment would be more robust as vaccines became widely available and economies reopened. In March, the Fed projected the inflation rate would subside to 2.2% by the end of the year and a rate hike wouldn't come until 2023.

On Wednesday, Powell acknowledged the factors driving inflation were "greater and longer-lasting than anticipated." Bottlenecks and shortages continue plaguing global supply chains. Employment growth remains constrained by pandemic factors, including fear of the virus and the limited availability of child care.

As a result, inflation will remain "elevated" in the coming months before "moderating" to 2.2% by 2022, Powell said.

Until then, Americans are staring down the twin barrels of higher prices and wages that are not keeping pace with inflation.

"Some of the gains we had seen for workers in certain categories, the increases looked good, but not if you have 5% inflation," said Jim Butkiewicz, an economist at the University of Delaware.

Consumers are now paying 5.3% more for goods across the board than they were last year, according to the latest Bureau of Labor Statistics report. Gasoline was up 42%. Almost every grocery store food group increased, with beef prices up 14%, chicken 7% and eggs up 10%. Used car prices surged 32% amid a global chip shortage. The cost of lumber was up 10% and most home building components, like windows, roofing tiles, doors and steel, rose 22%.

According to the Atlanta Fed, workers earning the lowest salaries saw a 4.8% increase this year, the highest rate of growth in almost two decades. Worker shortages helped drive up wages, particularly for lower-skill, lower-paid workers. Major companies including Walmart, Target and Costco announced wage increases to $15 an hour and above. Restaurants, struggling to make a comeback, offered sign-on bonuses and higher wages to attract more help.

Across the board, wages increased by 3.5%. Inflation erased all of those gains. The lowest-paid workers who saw the strongest growth, had an effective 0.5% decline in their real wages.

Inflation is likely to continue eating through Americans' wallets through the end of the year. Last month, the producer price index, which measures inflation at the wholesale level, hit 8.3%, the highest it had been since the Labor Department began tracking it in 2010. Those price increases are typically passed along to the consumer.

Procter & Gamble, the household goods giant, Sysco, one of the country's largest food distributors, Coca-Cola, Nestle and Kraft Heinz have either raised prices on their products or plan to before the end of the year.

The price increases are also hitting at a time when most federal stimulus payments have ended. Pandemic unemployment benefits expired Sept. 4. There are no plans for a fourth round of stimulus checks. Most families with children are up to $300 in monthly child tax credit payments through the end of the year.

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While many blame the stimulus payments for fueling inflation, research shows the federal infusion boosted personal income and accelerated the economic recovery by increasing household spending.

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