Perhaps you have noticed the prices of items at the grocery store increasing, or perhaps each visit to the gas pump has been taking a toll on your wallet as of late.
Inflation, the gradual increase in the price of goods and services over time, is responsible for these higher prices. Today, it costs $168.77 to buy the same goods that cost $100 in April 2000. Part of the reason that inflation occurs is because money does not have an anchor, and the government can print an unrestricted quantity of it. Assets like gold and land are real assets and are limited- in other words, you cannot produce more gold or land. On average, prices rise around two percent per year; a bit of inflation is healthy for the economy. However, in April, the Consumer Price Index (CPI), one of the main measurements of inflation that takes into account various household products, was 8.3% higher than the same time the year before. Inflation is at a level higher than it has been in nearly forty years due to myriad factors, including the global pandemic, the Russian invasion of Ukraine, and the government’s excessive printing of money.
When the Covid-19 pandemic began in March 2020, the global economy slowed to nearly a standstill. People stayed home, not eating out or travelling. To account for lower consumer demand, many companies reduced or halted their operations to remain financially afloat. Unemployment surged in the United States. In response, the Federal Reserve cut interest rates to prevent an economic collapse.
The United States government soon began extending aid to Americans, namely through stimulus checks and unemployment assistance, putting cash in their hands. Consequently, purchasing increased. As demand increased, though, the supply was still limited. Consumer demand for certain times, such as used cars, jumped. Low interest rates, high demand for housing as families fled pandemic-ravaged cities, and limited supply of construction materials coalesced to spur the pandemic housing boom. There were significant bottlenecks in the supply chain. Strong demand coupled with limited supply leads to price increases.
Some of the most notable jumps in pricing have been in used cars and food. In April, grocery prices increased 10.8% from a year earlier. According to the Bureau of Labor Statistics, at the “wholesale level,” producer prices have increased 11% over the past year. While employers are increasing workers’ wages, the inflation rate still generally outweighs wage growth. Many large companies are increasing prices of their goods and services. The Federal Reserve has begun the process of slowly raising interest rates, making borrowing more expensive. President Biden has also discussed potential legislative solutions to the inflation issue, introducing a plan to aid American farmers in increasing crop production to address the lower European food exports resulting from the conflict between Russia and Ukraine. Collectively, the two warring nations supply over one-quarter of global wheat exports, increasing prices of key food items. The conflict has also pushed oil prices higher.
It is hoped that the rate of inflation will peak sometime in the next few months. However, most experts acknowledge that it will still remain historically high for the foreseeable future.
Sources:
- https://www.cnbc.com/2022/05/12/wholesale-inflation-rose-11percent-in-april-as-producer-prices-keep-accelerating.html?&qsearchterm=inflation
- https://www.cnn.com/2022/01/09/economy/what-is-inflation-and-whos-to-blame/index.html
- https://www.wsj.com/articles/inflation-definition-cause-what-is-it-11644353564
- https://www.cnbc.com/2022/05/11/watch-biden-aims-to-boost-us-crop-production-amid-ukraine-war.html