It’s no secret at this point that inflation is rising at a rate not seen in several decades.
From March 2021 to March 2022, the cost of goods to consumers rose at an incredible clip – 8.5% in just 12 months, up from the 7.9% for the 12-month period that ended just a month earlier, from February 2021 to February 2022.
That’s the highest rate of increase in over 40 years. For a steeper increase, one must look all the way back to 1981.
Even without the spike in gas prices caused by Russia’s aggression towards Ukraine and the food cost hikes stemming from supply chain woes, core inflation still rose 6.5% over the last 12 months, again the steepest rise since the early 1980s.
So what is causing this trend that the Federal Reserve failed to foresee?
(In December 2020, the Federal forecast for 2021 saw inflation sitting around 1.8% by year’s end. In reality, it climbed all the way to 7%.)
The 2020 economic lockdown caused by the COVID-19 pandemic and the measures to help make people and businesses whole due to the stoppage caused a steep decline followed by a quick restart.
From April to June of 2020, the economy’s output rate broke records with its 31% decline. But stimulus checks and PPP loans issued by the government to help Americans stem what could have been catastrophic financial circumstances coupled with the release of the COVID vaccine heated up the economy again once the lockdown ended.
The 22 million jobs cut during the economic pause were suddenly available again, but the stimulus checks that kept Americans afloat also meant they could reevaluate their worklives rather than settling for returning to jobs that didn’t suit them.
The lack of available employees meant supply couldn’t keep up with demand, and the supply chain buckled and collapsed under the weight of expectations that couldn’t be met. When high demand meets limited supply, prices rise.
Meanwhile, some have also criticized the Fed itself for its lengthy stretch of keeping interest rates hovering around zero, which they say has led to a rise in the price of everything from houses to stocks.
Of course, the most important question right now concerns exactly how long this inflation trend will last.
While the outlook remains foggy due to the unpredictable nature of COVID and what new variants might arise to threaten public health, there are signs that the inflation wave is cresting and will wane soon.
The job market is recovering, with about 560,000 new jobs having been added per month so far in 2022 and a record 6.7 million in 2021. And with no more government stimulus checks on the horizon, Americans who were holding out due to an economic cushion will need to return to work.
The supply chain is also recovering and is beginning to catch up to its normal expectations, and the Federal Reserve is moving towards anti-inflation policies that could slow the eagerness for big purchases. So while many economists predict inflation remaining above the Fed’s target line of 2% at year’s end, it should be below last year’s 7% mark.
Related
