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    Persistent Inflation Puts Yellen in the Spotlight

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    WASHINGTON — At her confirmation hearing in early 2021, Treasury Secretary Janet L. Yellen told lawmakers that it was time to “act big” on a pandemic relief package, playing down concerns about deficits at a time of perpetually low interest rates and warning that inaction could mean widespread economic “scarring.”A year and a half later, prices are soaring and interest rates are marching higher. As a result, Ms. Yellen’s role in crafting and selling the $1.9 trillion American Rescue Plan, which Congress passed in March of last year, is being parsed amid an intensifying blame game to determine who is responsible for the highest rates of inflation in 40 years. After months of pinning rising prices on temporary supply chain problems that would dissipate, Ms. Yellen acknowledged last week that she had gotten it “wrong,” putting the Biden administration on the defensive and thrusting herself into the middle of a political storm.“I think I was wrong then about the path that inflation would take,” Ms. Yellen said in an interview with CNN, adding that the economy had faced unanticipated “shocks” that boosted food and energy prices.Republican lawmakers, who have spent months blaming President Biden and Democrats for rising prices, gleefully seized upon the admission as evidence that the administration had mismanaged the economy and should not be trusted to remain in political control.The Treasury Department has scrambled to clarify Ms. Yellen’s remarks, saying her acknowledgment that she misread inflation simply meant that she could not have foreseen developments such as the war in Ukraine, new variants of the coronavirus or lockdowns in China. After a book excerpt suggested Ms. Yellen favored a stimulus package smaller than the $1.9 trillion that Congress approved last year, the Treasury released a statement denying that she had urged more spending restraint.At this tenuous moment in her tenure, Ms. Yellen is expected to face tough questions on inflation when she testifies before the Senate Finance Committee on Tuesday and the House Ways and Means Committee on Wednesday. The hearings are ostensibly about the president’s budget request for the 2023 fiscal year, but Republicans are blaming Mr. Biden’s policies, including the $1.9 trillion stimulus package, for high prices for consumer products, and Ms. Yellen’s comments have given them grist to cast his first term as a failure.“How can Americans trust the Biden administration when the same people that were so wrong are still in charge?” said Tommy Pigott, rapid response director for the Republican National Committee.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Measuring Inflation: Over the years economists have tweaked one of the government’s standard measures of inflation, the Consumer Price Index. What is behind the changes?Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.The glare is particularly uncomfortable for Ms. Yellen, an economist and former chair of the Federal Reserve, who prides herself on giving straight answers and staying above the political fray.In recent weeks, Ms. Yellen has had to defend the Biden administration’s economic policies even as fault lines have emerged within the economic team. She has expressed reservations about the lack of progress in rolling back some of the Trump administration’s China tariffs, which she views as taxes on consumers that were “not strategic,” and she has been reluctant to support student debt forgiveness proposals, which could further fuel inflation if people have more money to spend.Over the weekend, Ms. Yellen came under fire again after an excerpt from a forthcoming biography of her indicated that she had sought unsuccessfully to pare down the pandemic aid bill because of inflation concerns. The Treasury Department released a rare Saturday statement from Ms. Yellen denying that she argued that the package was too big.“I never urged adoption of a smaller American Rescue Plan package,” she said, insisting that the funds have helped the United States economy weather the pandemic and the fallout from Russia’s war in Ukraine.Throughout the last year, Ms. Yellen has been an ardent public defender of the Biden administration’s economic agenda. She has clashed publicly at times with critics such as Lawrence H. Summers, a former Treasury secretary, who warned that too much stimulus could overheat the economy.For months, Ms. Yellen — and many other economists — talked about inflation as “transitory,” saying rising prices were the result of supply chain problems that would dissipate and “base effects,” which were making the monthly numbers look worse in comparison with prices that were depressed during the early days of the pandemic.By May of last year, Ms. Yellen appeared to acknowledge that the Biden administration’s spending proposals had the potential to overheat the economy. She noted at The Atlantic’s Future Economy Summit that the policies could spur growth and that the Fed might have to step in with “modest” interest rate increases if the economy revved up too much.“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” Ms. Yellen said.But economic indicators still suggested that inflation remained under control through much of that spring. In an interview with The New York Times last June, Ms. Yellen said she believed that inflation expectations were in line with the Federal Reserve’s 2 percent target and that while wages were increasing, she did not see a “wage price spiral” on the horizon that could cause inflation to become entrenched.“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” she said, adding that she did not see that happening.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Is ‘Greedflation’ Rewriting Economics, or Do Old Rules Still Apply?

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    Economists and politicians are debating whether monopolistic companies are fueling inflation in ways that confound longstanding theory.There are few good things about living through a period with the highest inflation in four decades, but here’s one: It’s a chance to re-examine what happens in an economy that’s gone haywire.Since prices started to escalate a year ago, politicians and economists have seized on inflation to tell their preferred story about what went wrong, and what policies would bring it back into line. Some say it’s very straightforward: Supply and demand, Economics 101.“There’s simply a lot of cash out there,” said Joe Brusuelas, chief economist for the accounting firm RSM US, referring to the several trillion dollars in pandemic stimulus that’s filtered into the economy since early 2020. “The competition for those goods is up and that’s sending prices up, whether we’re talking about getting a Nissan Sentra or a seat on an American Airlines flight.”The White House and progressive organizations, however, say wait a minute: This time is different. In a time of extraordinary disruption, they contend, increasingly dominant corporations are taking the opportunity to jack up prices more than they otherwise could, which is squeezing consumers and supercharging inflation. Or “greedflation,” as the hypothesis has come to be known.The argument comports with the Biden administration’s focus on the ills of economic concentration. Congressional Democrats have run with the idea, introducing bills that would impose a temporary “excess profits tax” on companies that charge prices they deem unreasonably high, or simply ban those high prices altogether. Critics, including the nation’s largest business lobby, deride these efforts as based on a “conspiracy theory” and a “flimsy argument.”So what’s really going on?It’s hard to tease out. A pandemic, a trade war, a land war, huge government spending, and a global economy that’s become vastly more integrated might be too complex for traditional macroeconomic theory to explain. Josh Bivens, research director at the left-leaning Economic Policy Institute, thinks that’s a good reason to revisit what the discipline thought it had figured out.“When I hear stories about an overheating labor market, I don’t think about falling real wages, and yet we have falling real wages,” Dr. Bivens said. Nor is the rise in profits typical when unemployment is so low. “The idea that ‘there’s nothing to see here’ — there’s everything to see here! It’s totally different.”When thinking about greedflation, it’s helpful to break it down into three questions: Are companies charging more than necessary to cover their rising costs? If so, is that enough to meaningfully accelerate inflation? And is all this happening because large companies have market power they didn’t decades ago?Productive Profits, or Gouging?There is not much disagreement that many companies have marked up goods in excess of their own rising costs. This is especially evident in industries like shipping, which had record profits as soaring demand for goods filled up boats, driving up costs for all traded goods. Across the economy, profit margins surged during the pandemic and remained elevated.When all prices are rising, consumers lose track of how much is reasonable to pay. “In the inflationary environment, everybody knows that prices are increasing,” said Z. John Zhang, a professor of marketing at the Wharton School at the University of Pennsylvania who has studied pricing strategy. “Obviously that’s a great opportunity for every firm to realign their prices as much as they can. You’re not going to have an opportunity again like this for a long time.”Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Measuring Inflation: Over the years economists have tweaked one of the government’s standard measures of inflation, the Consumer Price Index. What is behind the changes?Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.The real disagreement is over whether higher profits are natural and good.Basic economic theory teaches that charging what the market can bear will prompt companies to produce more, constraining prices and ensuring that more people have access to the good that’s in short supply. Say you make empanadas, and enough people want to buy them that you can charge $5 each even though they cost only $3 to produce. That might allow you to invest in another oven so you can make more empanadas — perhaps so many that you can lower the price to $4 and sell enough that your net income still goes up.Here’s the problem: What if there’s a waiting list for new ovens because of a strike at the oven factory, and you’re already running three shifts? You can’t make more empanadas, but their popularity has risen to the point where you would charge $6. People might buy calzones instead, but eventually the oven shortage makes all kinds of baked goods hard to find. In that situation, you make a tidy margin without doing much work, and your consumers lose out.This has happened in the real world. Consider the supply of fertilizer, which shrank when Russia’s invasion of Ukraine prompted sanctions on the chemicals needed to make it. Fertilizer companies reported their best profits in years, even as they struggle to expand supply. The same is true of oil. Drillers haven’t wanted to expand production because the last time they did so, they wound up in a glut. Ramping up production is expensive, and investors are demanding profitability, so supply has lagged while drivers pay dearly.Even if high prices aren’t able to increase supply and the shortage remains, an Economics 101 class might still teach that price is the best way to allocate scarce resources — or at least, that it’s better than the government price controls or rationing. As a consequence, less wealthy people may simply have no access to empanadas. Michael Faulkender, a finance professor at the University of Maryland, says that’s just how capitalism works.“With a price adjustment, people who have substitutes or maybe can do with less of it will choose to consume less of it, and you have the allocation of goods for which there is a shortage go to the highest-value usage,” Dr. Faulkender said. “Every good in our society is based on pricing. People who make more money are able to consume more.”Sorting Chickens and EggsThe question of whether profit margins are speeding inflation is harder to figure out.Economists have run some numbers on how much other variables might have contributed to inflation. The Federal Reserve Bank of San Francisco found that fiscal stimulus programs accounted for 3 percentage points, for example, while the St. Louis Fed estimated that manufacturing sector inflation would have been 20 percentage points lower without supply chain bottlenecks. Dr. Bivens, of the Economic Policy Institute, performed a simple calculation of the share of price increases attributable to labor costs, other inputs, and profits over time, and found that profit’s contribution had risen significantly since the beginning of 2020 as compared with the previous four decades.That’s an interesting fact, but it’s not proof that profits are driving inflation. It’s possible that causality runs the other way — inflation drives higher profits, as companies hide price increases amid broader rises in costs. The St. Louis Fed’s Ana Maria Santacreu, who did the manufacturing inflation analysis, said that it would be very hard to pin down.“It would be interesting to get data on profit margins by industry and correlate those with inflation by industry,” she said. “But I still think it is difficult to capture any causal relationship.”Concentration’s Double EdgeIf you think that’s complicated, try establishing whether market power is playing a role in any of this.It is well established that the American economy has grown more concentrated. On a fundamental level, domination by a few companies may have made supply chains more brittle. If there are two empanada factories and one of them has a Covid-19 outbreak, that in itself creates a more serious shortage than it would if there were 10 factories.“Concentration has affected prices during the pandemic, even setting aside any potentially nefarious actions on the part of leaders,” said Heather Boushey, a member of President Biden’s Council of Economic Advisers.But most of the public argument has been about whether companies with more market share have been affecting prices once goods are finished and delivered. And that’s where many economists become skeptical, noting that if these increasingly powerful corporations had so much leverage, they would have used it before the pandemic.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    U.S. Technology, a Longtime Tool for Russia, Becomes a Vulnerability

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    Global restrictions on sending advanced technology to Russia are hampering the country’s military capacity, U.S. officials say, though Russia has stockpiled American equipment for years.WASHINGTON — With magnifying glasses, screwdrivers and a delicate touch from a soldering gun, two men from an investigative group that tracks weapons pried open Russian munitions and equipment that had been captured across Ukraine.Over a week’s visit to Ukraine last month, the investigators pulled apart every piece of advanced Russian hardware they could get their hands on, such as small laser range finders and guidance sections of cruise missiles. The researchers, who were invited by the Ukrainian security service to independently analyze advanced Russian gear, found that almost all of it included parts from companies based in the United States and the European Union: microchips, circuit boards, engines, antenna and other equipment.“Advanced Russian weapons and communications systems have been built around Western chips,” said Damien Spleeters, one of the investigators with Conflict Armament Research, which identifies and tracks weapons and ammunition. He added that Russian companies had enjoyed access to an “unabated supply” of Western technology for decades.U.S. officials have long been proud of their country’s ability to supply technology and munitions to the rest of the world. But since Russia invaded Ukraine in late February, the United States has faced an unfortunate reality: The tools that Russian forces are using to wage war are often powered by American innovation.Still, while the technology made by American and European companies has been turned against Ukraine, the situation has also given the United States and its allies an important source of leverage against Russia. The United States and dozens of countries have used export bans to cut off shipments of advanced technology, hobbling Russia’s ability to produce weapons to replace those that have been destroyed in the war, according to American and European officials.On Thursday, the Biden administration announced further sanctions and restrictions on Russia and Belarus, adding 71 organizations to a government list that prevents them from buying advanced technology. The Treasury Department also announced sanctions against a yacht-management company that caters to Russian oligarchs.While some analysts have urged caution about drawing early conclusions, saying the measures will take time to have a full effect, the Biden administration has called them a success. Since Western allies announced extensive restrictions on exports of semiconductors, computers, lasers, telecommunications equipment and other goods in February, Russia has had difficulty obtaining microchips to replenish its supply of precision-guided munitions, according to one senior U.S. official, who, along with most other officials interviewed for this article, spoke on the condition of anonymity to discuss matters based on intelligence.On Tuesday, when asked if a chip shortage was crippling the Russian military, Commerce Secretary Gina Raimondo, who oversees export controls, said the answer was “an unqualified yes.”“U.S. exports to Russia in the categories where we have export controls, including semiconductors, are down by over 90 percent since Feb. 24,” she said. “So that is crippling.”The restrictions halt direct technological exports from the United States and dozens of partner nations to Russia. But they also go beyond traditional wartime sanctions issued by the U.S. government by placing limitations on certain high-tech goods that are manufactured anywhere in the world using American machinery, software or blueprints. That means countries that are not in the sanctions coalition with the United States and Europe must also follow the rules or potentially face their own sanctions.Russia has stopped publishing monthly trade data since the invasion, but customs data from its major trading partners show that shipments of essential parts and components have fallen sharply. According to data compiled by Matthew C. Klein, an economics researcher who tracks the effect of the export controls, Russian imports of manufactured goods from nine major economies for which data is available were down 51 percent in April compared with the average from September 2021 to February 2022.The restrictions have rendered the old-school bombing runs on tank factories and shipyards of past wars unnecessary, Mr. Klein wrote. “The democracies can replicate the effect of well-targeted bombing runs with the right set of sanctions precisely because the Russian military depends on imported equipment.”Russia is one of the world’s largest arms exporters, especially to India, but its industry relies heavily on imported inputs. In 2018, Russian sources satisfied only about half of the military-related equipment and services the country needed, such as transportation equipment, computers, optical equipment, machinery and fabricated metal, according to data from the Organization for Economic Cooperation and Development compiled by Mr. Klein.The remainder of equipment and services used by Russia were imported, with about a third coming from the United States, Europe, Japan, Taiwan, Australia and other partner governments that imposed sanctions together on Moscow.A printed circuit board from a cruise missile internal computer collected by Conflict Armament Research during its investigation.via Conflict Armament ResearchU.S. officials say that in concert with a wide variety of other sanctions that ban or discourage commercial relations, the export controls have been highly effective. They have pointed to Russian tank factories that have furloughed workers and struggled with shortages of parts. The U.S. government has also received reports that the Russian military is scrambling to find parts for satellites, avionics and night vision goggles, officials say.Technology restrictions have harmed other Russian industries as well, U.S. officials say. Equipment for the oil and gas industry has been degraded, maintenance for tractors and heavy equipment made by Caterpillar and John Deere has halted, and up to 70 percent of the commercial airplanes operated by Russian airlines, which no longer receive spare parts and maintenance from Airbus and Boeing, are grounded, officials say.But some experts have sounded notes of caution. Michael Kofman, the director of Russia studies at CNA, a research institute in Arlington, Va., voiced skepticism about some claims that the export controls were forcing some tank factories and other defense companies in Russia to shutter.“There’s not been much evidence to substantiate reports of problems in Russia’s defense sector,” he said. It was still too early in the war to expect meaningful supply chain problems in Russia’s defense industry, he said, and the sourcing for those early claims was unclear.Maria Snegovaya, a visiting scholar at George Washington University who has studied sanctions on Russia, said the lack of critical technologies and maintenance was likely to start being felt widely across Russian industry in the fall, as companies run out of parts and supplies or need upkeep on equipment. She and other analysts said even the production of daily goods such as printer paper would be affected; Russian companies had bought the dye to turn the paper white from Western companies.“We expect random disruptions in Russia’s production chains to manifest themselves more frequently,” Ms. Snegovaya said. “The question is: Are Russian companies able to find substitutes?”U.S. officials say the Russian government and companies there have been looking for ways to get around the controls but have so far been largely unsuccessful. The Biden administration has threatened to penalize any company that helps Russia evade sanctions by cutting it off from access to U.S. technology.The Russia-Ukraine War and the Global EconomyCard 1 of 7A far-reaching conflict. More

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    In South Korea, Joe Biden Seeks to Rebuild Economic Ties Across Asia

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    The president plans to unveil a new regional economic framework, but some in the region wonder whether it will be an empty exercise.PYEONGTAEK, South Korea — When President Biden arrived on his inaugural mission to Asia on Friday, the first place he headed from the airplane was not a government hall or embassy or even a military base, but a sprawling superconductor factory that represented the real battleground of a 21st-century struggle for influence in the region.The choice of destination to begin a five-day trip to South Korea and Japan underscored the challenges of Mr. Biden’s effort to rebuild American ties to a region where longtime allies have grown uncertain about Washington’s commitments amid anti-trade sentiment at home, while China has expanded its dominance in the economic arena.The president hopes to lure countries back into the American orbit despite his predecessor Donald J. Trump’s decision five years ago to abandon a far-reaching trade pact known as the Trans-Pacific Partnership — but not by rejoining the economic bloc, even though it was negotiated by the Obama administration that he served as vice president. Instead, under pressure from his liberal base at home, Mr. Biden plans to offer a far less sweeping multinational economic structure that has some in the region skeptical about what it will add up to.Mr. Biden will formally unveil the Indo-Pacific Economic Framework on Monday in Tokyo, bringing together many of the same countries from the trade partnership to coordinate policies on energy, supply chains and other issues, but without the market access or tariff reductions that powered the original partnership. Eager for American leadership to counter China, a number of countries in the region plan to sign up and hail the new alignment but privately have expressed concern that it may be an empty exercise.The framework is essentially “a new packaging of existing Biden administration priorities in this economic policy area,” said Scott A. Snyder, the director of U.S.-Korea policy at the Council on Foreign Relations. “And whether or not it really takes off depends on whether partners believe that there’s enough there there to justify being engaged.”Mr. Snyder added that he thought South Korea, for one, was taking seriously the Biden administration’s commitment to invest in the region. “I think they’re believing,” he said. “And we’ll see whether they’re whistling past the graveyard.”But even Mr. Biden’s own ambassador to Japan, Rahm Emanuel, acknowledged the uncertainty in the region over the new economic framework. Countries want to know, “what is it we are signing up for?” he told reporters in Tokyo on Thursday. Is this an alternative to the Trans-Pacific Partnership? “Yes and no,” he said.Understand the Supply Chain CrisisThe Origins of the Crisis: The pandemic created worldwide economic turmoil. We broke down how it happened.Explaining the Shortages: Why is this happening? When will it end? Here are some answers to your questions.A New Normal?: The chaos at ports, warehouses and retailers will probably persist through 2022, and perhaps even longer.A Key Factor in Inflation: In the U.S., inflation is hitting its highest level in decades. Supply chain issues play a big role.The framework is not a traditional free trade agreement but instead an architecture for negotiation to address four major areas: supply chains, the digital economy, clean energy transformation and investments in infrastructure. Jake Sullivan, the president’s national security adviser, said it would be “a big deal” and a “significant milestone” for relations with the region.“When you hear some of the, ‘Well, we don’t quite know. We’re not sure because it doesn’t look like things have looked before,’ I say, ‘Just you wait,’” he told reporters on Air Force One as it made its way across the Pacific. “Because I think this is going to be the new model of economic arrangement that will set the terms and rules of the road for trade and technology and supply chains for the 21st century.”Mr. Sullivan said there will be “a significant roster of countries” joining the framework when Mr. Biden kicks it off on Monday, but administration officials have not identified which countries. Japan, which has signaled that it would rather the United States rejoin the Trans-Pacific Partnership, will nonetheless embrace the new framework as the best it can get at the moment, as will South Korea. Singapore, Thailand and the Philippines have indicated interest in joining, while India and Indonesia have expressed some reservations.Prime Minister Pham Minh Chinh of Vietnam said this month that it was still not clear what the new framework would mean in concrete terms. “We are ready to work alongside the U.S. to discuss, to further clarify what these pillars entail,” he said at a forum held by the Center for Strategic and International Studies.The Financial Times reported that the administration had diluted the language of the organizing statement to entice more countries to join. Some countries are concerned that the United States will force labor and environmental standards on them without the trade-offs of better trading terms, which are off the table because of liberal opposition within Mr. Biden’s party.“There’s a reason that the original T.P.P. was derailed,” Senator Elizabeth Warren, Democrat of Massachusetts, said at a hearing last month. “It would have off-shored more jobs to countries that use child labor and prison labor and pay workers almost nothing. Let me be clear: The I.P.E.F. cannot be T.P.P. 2.0.”Mr. Emanuel said the administration would describe the new framework process as a “consultation to negotiation,” as he put it. “We have to have an approach that respects countries where they are,” he said. “Meaning where Japan is or where Australia is, is not necessarily where Vietnam or Thailand or the Philippines are.”Moreover, he said, the administration wanted a framework that could survive beyond Mr. Biden’s presidency, unlike the Trans-Pacific Partnership. “We have an interest in saying we are still a player in the Pacific, and China has an interest in saying the U.S. is on its way out,” Mr. Emanuel said.Mr. Biden’s visit to the Samsung semiconductor facility immediately after disembarking from Air Force One served as a reminder of how critical the region is to his immediate priority of unsnarling the supply chain problems that have hurt American consumers back home.Shortly after landing at Osan Air Base, Mr. Biden joined President Yoon Suk-yeol of South Korea at the plant, praising it as a model for the type of manufacturing that the United States desperately needs to head off soaring inflation and to compete with China’s growing economic dominance.“This is an auspicious start to my visit, because it’s emblematic of the future cooperation and innovation that our nations can and must build together,” Mr. Biden said, noting that Samsung will invest $17 billion to build a similar plant in Taylor, Texas.“Our two nations work together to make the best, most advanced technology in the world,” Mr. Biden added, surrounded by monitors showing Samsung employees listening to his remarks. “And this factory is proof of that, and that gives both the Republic of Korea and the United States a competitive edge in the global economy if we can keep our supply chains resilient, reliable and secure.”Employees at the Samsung plant. Mr. Biden’s commerce secretary warned this year that the United States was facing an “alarming” shortage of semiconductors.Doug Mills/The New York TimesWhile demand for products containing semiconductors increased by 17 percent from 2019 to 2021, there has not been a comparable increase in supply, partly because of pandemic-related disruptions. As a result, automobile prices have skyrocketed and the need for more chips is likely to increase as 5G technology and electric vehicles become more widespread.The United States already faces an “alarming” shortage of the semiconductors, Gina Raimondo, Mr. Biden’s commerce secretary, warned this year, adding that the crisis had contributed to the highest level of inflation in roughly 40 years.How the Supply Chain Crisis UnfoldedCard 1 of 9The pandemic sparked the problem. More

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    Japan’s Economy Shrank 1 Percent as Consumers Fled Covid

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    TOKYO — Last December, after two years of stop-and-go growth, Japan’s economic engine seemed like it might finally be revving up. Covid cases were practically nonexistent. Consumers were back on the town, shopping, eating out, traveling. The year 2021 ended on a high note, with the country’s economy expanding on an annual basis for the first time in three years.But the Omicron variant of the coronavirus, geopolitical turmoil and supply chain snarls have once again set back Japan’s fragile economic recovery. In the first three months of the year, the country’s economy, the world’s third largest after the United States and China, shrank at an annualized rate of 1 percent, government data showed on Wednesday. A combination of factors contributed to the decline in growth. In January, Japan had put into place new emergency measures as coronavirus case numbers, driven up by Omicron, moved toward the highest levels of the pandemic. In February, Russia invaded Ukraine, spiking energy prices. And that was before China, Japan’s largest export market and a key supplier of parts and labor to its manufacturers, imposed new lockdowns in Shanghai, throwing supply chains into chaos.The contraction has not been as “extreme” as previous economic setbacks thanks to high levels of vaccine uptake and less wide-ranging emergency measures than during previous waves of the coronavirus, according to Shinichiro Kobayashi, principal economist at the Mitsubishi UFJ Research Institute.But Japan’s economic recovery from the enormous damage done by the pandemic has also not been as fast as the United States, China or the European Union, he said.Understand the Supply Chain CrisisThe Origins of the Crisis: The pandemic created worldwide economic turmoil. We broke down how it happened.Explaining the Shortages: Why is this happening? When will it end? Here are some answers to your questions.A New Normal?: The chaos at ports, warehouses and retailers will probably persist through 2022, and perhaps even longer.A Key Factor in Inflation: In the U.S., inflation is hitting its highest level in decades. Supply chain issues play a big role.“The pace has been slow,” he said, adding that Japan was the “only country among major economies that hasn’t recovered.”Growth is likely to bounce back strongly in the second quarter, analysts said, a pattern that has defined Japan’s economy during the pandemic: Demand has waxed as Covid cases have waned, and vice versa.Still, growth in the coming months will face some tough challenges. The pandemic and the war in Ukraine have fueled big increases in the costs of food and energy in Japan. And moves by the U.S. Federal Reserve to tackle high inflation have caused the value of the Japanese currency, the yen, to plummet. That has driven up costs in the resource-poor country, which is highly dependent on imports for food, fuel and raw materials.Inflation in the country, while still modest, is rising at its fastest pace in years, with consumer prices in Tokyo increasing by 2.5 percent in April. And over the last year, prices for producers have shot up 10 percent, the highest levels since 1980.China’s draconian efforts to keep Covid under control are likely to create additional disruptions for Japanese companies that manufacture, source parts and export their goods there.How the Supply Chain Crisis UnfoldedCard 1 of 9The pandemic sparked the problem. More

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    Powell says the Fed is watching for ‘clear and convincing’ signs of inflation fading.

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    Jerome H. Powell, the chair of the Federal Reserve, said that the central bank is focused on getting rapid inflation under control and that it is ready to intensify its efforts to tamp down price pressures if they do not begin to ease as policymakers expect.“What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down — and if we don’t see that, then we’ll have to consider moving more aggressively,” Mr. Powell said, speaking Tuesday afternoon on livestream hosted by The Wall Street Journal. “If we do see that, then we can consider moving to a slower pace.”Consumer prices climbed 8.3 percent in April from the prior year, and while inflation eased somewhat on an annual basis, the details of the report suggested that price pressures continue to run hot.The central bank has begun raising interest rates to try and cool the economy, announcing a quarter-point increase in March and a half-point increase earlier this month, which was the Fed’s largest increase since 2000. Mr. Powell and his colleagues have signaled that they will continue to push borrowing costs higher as they attempt to restrain spending and hiring, hoping to bring demand and supply into balance.They could raise rates by half-percentage-point increments at each of the Fed’s next two meetings, Mr. Powell suggested after the central bank’s May meeting. He repeated that message on Tuesday.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.“There was very broad support on the committee for having on the table the idea of doing additional rate increases of that magnitude at each of the next two meetings,” Mr. Powell said. “That’s short of a prediction.”While Mr. Powell emphasized the economic outlook is very uncertain, he and his colleagues have suggested that they want to push interest rates up to a neutral setting — a place where they are neither stoking nor slowing growth — “expeditiously.” But Mr. Powell suggested that officials are willing to raise rates beyond that if it is necessary to do so to control inflation.“We won’t hesitate at all to do that,” he said. “We will go until we feel like we’re at a place where we can say, ‘Yes, financial conditions are at an appropriate place, we see inflation coming down.’”The Fed chair said that the central bank can no longer simply hope that supply chain issues improve and help inflation to fade, and that it has to instead be proactive in trying to restrain prices by cooling down the economy.“We clearly have a job to do on demand — there is an imbalance in the economy broadly between demand and supply,” Mr. Powell said. He pointed in particular to the labor market, where workers are in short supply and wages are rising swiftly as employers compete to hire them.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    The Era of Cheap and Plenty May Be Ending

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    Supplies of goods are coming up short in the pandemic, and prices have jumped. Some economists warn that the changes could linger.For the past three decades, companies and consumers benefited from cross-border connections that kept a steady supply of electronics, clothes, toys and other goods so abundant it helped prices stay low.But as the pandemic and the war in Ukraine continue to weigh on trade and business ties, that period of plenty appears to be undergoing a partial reversal. Companies are rethinking where to source their products and stocking up on inventory, even if that means lower efficiency and higher costs. If it lasts, such a shift away from fine-tuned globalization could have important implications for inflation and the world’s economy.Economists are debating whether recent supply chain turmoil and geopolitical conflicts will result in a reversal or reconfiguration of global production, in which factories that were sent offshore move back to the United States and other countries that pose less of a political risk.If that happens, a decades-long decline in the prices of many goods could come to an end or even begin to go in the other direction, potentially boosting overall inflation. Since around 1995, durable goods like cars and equipment have tamped down inflation, and prices for nondurable goods like clothing and toys have often grown only slowly.Those trends began to change in late 2020 after the onset of the pandemic, as shipping costs soared and shortages collided with strong demand to push car, furniture and equipment prices higher. While few economists expect the past year’s breakneck price increases to continue, the question is whether the trend toward at least slightly pricier goods will last.The answer could hinge on whether a shift away from globalization takes hold.“It would certainly be a different world — it might be a world of perhaps higher inflation, perhaps lower productivity, but more resilient, more robust supply chains,” Jerome H. Powell, the Fed chair, said at an event last month when asked about a possible move away from globalization.Still, Mr. Powell said, it’s not obvious how drastically conditions will change. “It’s not clear that we’re seeing a reversal of globalization,” he said. “It’s clear that it’s slowed down.”Prices Have Shot UpPrices for durable goods had been falling for decades. Lately, though, they’ve been a major factor pushing inflation higher.

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    Annual Change in the Personal Consumption Expenditure Index by Category
    Source: Commerce DepartmentBy The New York TimesThe period of global integration that prevailed before the pandemic made many of the things Americans buy cheaper. Computers and other technology made factories more efficient, and they chugged out sneakers, kitchen tables and electronics at a pace unmatched in history. Companies slashed their production cost by moving factories offshore, where wages were lower. The adoption of steel shipping containers, and ever larger cargo ships, allowed products to be whisked from Bangladesh and China to Seattle and Tupelo and everywhere in between for astonishingly low prices.But those changes also had consequences for American factory workers, who saw many jobs disappear. The political backlash to globalization helped carry former President Donald J. Trump into office, as he promised to bring factories back to the United States. His trade wars and rising tariffs encouraged some companies to move operations out of China, although typically to other low-cost countries like Vietnam and Mexico.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.The pandemic also exposed the snowball effect of highly optimized supply chains: Factory shutdowns and transportation delays made it difficult to secure some goods and parts, including semiconductors that are crucial for electronics, appliances and cars. Shipping costs have soared by a factor of 10 in just two years, erasing the cost savings of making some products overseas.Starting late in 2020, prices for washing machines, couches and other big products jumped sharply as production limitations collided with high demand.Inflation has only accelerated since. Russia’s invasion of Ukraine has further snarled supply chains, raising the prices of gas and other commodities in recent months and helping to push the Fed’s closely watched inflation index up 6.6 percent over the year through March.That is the fastest pace of inflation since 1982, and price gains are touching the highest level in decades across many advanced economies, including the eurozone and Britain.Many economists expect price increases for durable goods to cool substantially in the months ahead, which should help calm overall price gains. Data from March suggested that they were beginning to moderate. Rising Fed interest rates could help temper buying, as borrowing to buy cars, machines or home improvement supplies becomes more expensive.But there are still questions about whether — in light of what companies and countries have learned — major products will return to the steady price declines that were the norm before the coronavirus.It’s not clear yet to what extent factories are moving closer to home. A “reshoring index” published by Kearney, a management consulting firm, was negative in 2020 and 2021, indicating that the United States was importing more manufactured goods from low-cost countries.But more firms reported moving their supply chains out of China to other countries, and American executives were more positive about bringing more manufacturing to the United States.Duke Realty, which rents warehouse and industrial facilities in the United States, expects the change to be a source of demand in years to come, though the reworking may take a while. Customers are “now future-proofing their supply chains,” Steve Schnur, the firm’s chief operating officer, said on an earnings call last week.“Some reshoring is occurring — let’s make no mistake about that,” Ngozi Okonjo-Iweala, the director general of the World Trade Organization, said in an interview. But the data show that most businesses are mitigating risk by building up their inventories and finding additional suppliers in low-cost countries, Dr. Okonjo-Iweala said. That process could end up integrating poorer countries in Africa and other parts of the world more deeply into global value chains, she said.Janet L. Yellen, the Treasury secretary, said last month that supply chains had proved too vulnerable given the pandemic and the war in Ukraine, and urged a reorientation around “a large group of trusted partners,” an approach she called “friendshoring.”The approach might result in some higher costs, she said, but it would be more resilient, and a large enough group would allow countries to maintain efficiencies from the global division of labor.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    The Fed’s favorite inflation index is still rising fast, but shows some hints of slowing.

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    The price index that the Federal Reserve watches most closely climbed 6.6 percent in the year through March, the fastest pace of inflation since 1982 and the latest reminder of the painfully rapid price increases plaguing consumers and challenging policymakers.Much of the gain in the Personal Consumption Expenditures price index, released Friday, was driven by a pop in energy prices that came early in Russia’s invasion of Ukraine along with rising food costs. After stripping out volatile food and fuel prices, a core index climbed by a slightly more muted 5.2 percent in the year through March.On a monthly basis, that core measure picked up by 0.3 percent, slower than its pace the previous month.Central bank and White House officials spent much of 2021 hoping that a pandemic-era surge in used car prices and cost increases in other goods would fade as supply chains returned to normal, and strong demand cooled. But inflation has remained too high for the Fed’s comfort for a year, despite occasional hopeful signs like the latest monthly slowdown in the core measure, and its persistence is now drawing a firm response from the central bank.Policymakers lifted interest rates in March for the first time since 2018, and have set the stage for an even larger rate increase at their meeting next week. Many Fed officials now expect to raise rates back to a neutral setting — around 2 percent — by the end of the year as they try to slow down borrowing, temper demand and allow supply to catch up. The goal is to help cool off inflation so that it does not become locked into consumer and business expectations, which might make it a more permanent feature of America’s economy.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.The task ahead is difficult. The Fed has in the past caused recessions while trying to weigh down high inflation. Officials are constraining demand just as the war in Ukraine ramps up uncertainty and threatens to keep prices for gas and other commodities elevated, potentially making the cental bank’s job even more challenging.White House officials have been emphasizing the role that the war is playing in elevating inflation, often blaming President Vladimir V. Putin of Russia for higher prices. While Russia’s invasion did push gas prices sharply higher last month, inflation had been high for months before the conflict.Government spending helped fuel some of that increase. As households received stimulus checks and expanded unemployment benefits in 2020 and 2021, they built up cash buffers, which has helped to sustain fervid spending on couches, cars and grills even as costs have climbed higher. Strong demand for goods in particular collided with shutdowns of overseas factories and overburdened transit routes to spur shortages and push prices up.Now, though, inflation has become broader. As employers struggle to hire enough workers to meet strong consumer demand, they are paying higher wages. That could prompt some businesses to charge more to cover their rising costs. It could also help households to keep up their spending.A number of services — notably rents and restaurant meals — have grown more expensive in recent months.The Fed is trying to keep those widespread price pressures from becoming embedded. While officials still expect price increases to begin fading soon and to be running considerably slower by the end of the year, they are no longer betting on that outcome.Inflation F.A.Q.Card 1 of 6What is inflation? More