You may have heard your parents complain about the rising costs of everything from groceries to gas, clothes, electronics, and even cars. They are not wrong. From March 2021 to March 2022, consumer prices for food rose by 8.8 percent, while energy costs went up 32 percent. The rate of increase in prices over a given period of time is called inflation.
What causes inflation?
Inflation can be caused by many factors. Sometimes it is due to the rising cost of raw materials, which makes the end product more expensive to manufacture. It can also be caused by employees asking for higher salaries. That's because companies typically make up for the increased cost by raising prices.
The current inflation is believed to be the result of the pent-up demand for goods and services once consumers emerged from the worst of the COVID-19 pandemic. Some experts believe the COVID-19 relief measures, which added $817 billion to American households in 2020, also contributed to the increase in demand. Russia's invasion of Ukraine, which led to a spike in energy prices, made things even worse.
"The biggest factor driving up inflation has been extraordinarily strong demand, as consumers have more money in their bank accounts, lower interest rates to borrow at stronger stock prices, and a lot of money they saved up because they didn't spend much in 2020," Jason Furman, a professor of practice at Harvard University and a former top economic advisor to President Barack Obama, said.
"That's been exacerbated more recently by things like the higher oil prices due to [Russian President Vladimir] Putin's invasion of Ukraine," Furman added.
Is inflation always harmful?
The slow and steady price increases, like the one the US and other countries have been experiencing for over 20 years, are beneficial to the economy. They help money keep its value. Low inflation also makes it easier for companies to plan long-term spending because they can accurately predict the costs in the years ahead.
But the same is not true about the runaway inflation we are currently experiencing. The higher costs would make it increasingly difficult for people to buy things they need and want. As sales slow down, companies are forced to make tough decisions, like laying off employees and delaying expansion plans. If left unchecked, high inflation could result in a severe economic slowdown, or recession.
What can the US government do to slow down inflation?
The first step to slowing runaway inflation is curbing consumer demand. The US Federal Reserve is trying to do that by raising interest rates, which were slashed to zero in 2020. The officials have thus far announced two increases totaling 75 basis points. Five additional rate hikes are forecast for this year. The higher interest rates make it more expensive for individuals and companies to borrow money and help cut down on their spending. They should, at least in theory, reduce demand, slow down the economy, and lower inflation to more normal levels.
"It's our job to make sure that inflation of that unpleasant high nature doesn't get entrenched in the economy," Fed Chair Jerome H. Powell said at a news conference on May 4, 2022. "The process of getting there involves higher rates — higher mortgage rates and higher borrowing rates, things like that. It's not going to be pleasant either, but in the end, everyone is better off — everyone. Particularly people on fixed incomes and at the lower part of the income distribution are better off with stable prices."
The Fed's effort will take some time. Meanwhile, the White House is trying to provide consumers immediate relief from high gasoline prices by releasing some of the country's strategic oil reserves. They may even temporarily stop collecting federal gas tax. The officials have also warned oil and gas companies to not keep prices artificially high for American consumers.
"If gas retailers' costs are going down, they need to immediately pass those savings on to consumers," former White House press secretary Jen Psaki told reporters on May 4, 2022. "The invasion of Ukraine and the volatility in the oil market is no excuse for excessive price increases, profit padding, or any effort to exploit American consumers."
Hopefully, the combined efforts will help reverse the rapidly rising inflation before it is too late.
Resources: Theeconomist.com, www.clevelandfed.org, abcnews.go,com, Qz.com
