By Elisa Sotero
Edited by Annika Lilja
As of now, inflation is affecting most Americans and the global community across a multitude of industries. According to the US Bureau of Labor Statistics, the annual inflation rate was at its highest level in over 40 years: 9.1% in June (policymakers believe a bearable inflation rate is 2%). It has pushed up prices for almost everything including rent, groceries, clothing, furniture, fuel, and electricity. Inflation is the rate of increase in prices over a given period. It is measured by the Consumer Price Index (CPI), which calculates the cost of goods consumers purchase out of pocket.
What causes inflation?
Although the causes of inflation are debatable, it commonly starts when people have surplus cash or access to a lot of credit. If consumers have access to more money, they may have more spending power with the ability to purchase large quantities of goods. When consumers are buying an overabundance of goods, businesses run out of supply quicker and inevitably, raise their prices. Economics 101: there is simply a lot of demand, but not enough supply.
COVID-19 plays a big role in supply shortages. Factories that were forced to shut down due to the pandemic, limited the supply of goods they produced. One of these factories are car manufacturers. Once again, when there’s a lot of demand, and not enough supply, the prices of goods, such as cars will increase.
Additionally, during lockdown, most people were at home and not traveling. This slowed down the hospitality industry. Once we got out of lockdown and people resumed traveling, airlines and hotels were forced to raise their prices to offset the pandemic-related losses and help keep their businesses from shutting down.
Since many Americans stayed home during the peak of the pandemic and reduced their spending, they were able to build up their savings and have more disposable income. Furthermore, some received government stimulus checks. In present time, we are happily past the days of lockdown, and some U.S. consumers find themselves spending away. This leads to high consumer spending and large demand.
Another contributing factor to rising inflation is the war between Russia and Ukraine. The Russia-Ukraine region is a global “breadbasket” (major food producers) as it plays a vital role in exporting wheat and fertilizer. The region is responsible for 30% of global exports of wheat and 65% of sunflower. Russia is a major supplier of oil, gas, and metals; while Ukraine is a supplier of wheat and corn. European economic sanctions on Russia and Ukraine have reduced supplies on these commodities, thereby driving up the prices for items such as oil and cereals. Limited oil production in Russia and Ukraine is driving up the price of fuel.
With originally low interest rates, Americans had easier access to buying real estate. This generated a larger demand from consumers, thereby significantly driving up real estate prices. The Federal Reserve saw low interest rates as one of the significant contributors to inflation, and in order to curb it, on June 15, 2022 they announced the largest interest rate hike since 1994:1.5% to 1.75%.
Who does inflation affect? How?
Low income: According to CNN, lower income households spend 77% of their money on necessities such as food, gas, and housing. With inflation significantly increasing the prices of those essentials, lower income individuals are forced to cut down.
Stock market and its investors: Once inflation hits, investments decline in terms of real-world purchasing power. In order to slow down one of the main causes of inflation, demand, the Federal Reserve is prompted to increase interest rates. A drastic increase in interest rates plunges the economy into recession, which is not ideal for stock market investors.
College Students: Although college tuition has been flat or increased slightly throughout the last few years, according to Jim Hundrieser, vice president for consulting and business development at the National Association of College and University Business Officers, “there’s absolutely going to be an increase in tuition and fees.” Those students working part time jobs are quitting because they don’t see significant benefits from their income toward a costly college tuition. Students know that regardless, they will wind up with large student loans after graduating. Therefore, most prefer to focus solely on their college experience. Ben Workman, an economics student at Harvard University says, “Prices have risen noticeably since I arrived on campus this fall.” He also mentions how minimum wage for undergraduates at Harvard remains unchanged.
The Unemployed: According to Investopedia, it is a historical trend that when inflation rises, unemployment drops. When unemployment is low, the amount of people searching for jobs is lower than the amount of jobs available. When employers are desperately searching for employees, they inflate the wages to attract employees. When wages increase, it allows the unemployed to spend more, which ultimately creates more demand in the market.
Senior Citizens/Retirees: Most seniors/retirees are on social security- in other words- a fixed income that does not change regardless of the rising rates of inflation. While inflation has caused the prices of groceries, fuel, healthcare, and rent to skyrocket, it makes it extremely difficult for seniors/retirees to pay for those goods and services. Therefore, many seniors are forced to cut back or eliminate certain costs altogether.
Light at the end of the tunnel:
How do we know when we’re coming out of inflation? The most common way to measure if the economy is back to normal, is through the annual CPI percent change. The Federal Reserve states that a normal inflation rate is at 2%, so once the U.S. economy is back to or close to 2%, it is an indicator that we have reached the light at the end of the tunnel.
According to a recent Bloomberg article, “one thing that could help the Fed out of its inflation difficulties would be if the US economy can achieve faster productivity growth.” This approach would allow companies to meet higher costs for labor or materials without raising prices to sustain their profits. “It’s what happened in the late 1990s as the internet took off, after a series of Fed rate increases kept inflation at bay.”
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