A guide to inflation, and what causes it, in the United States

A guide to inflation, and what causes it, in the United States.

According to the US Department of Labour’s Bureau of Labour Statistics, inflation spiked to its 40-year high in early 2022 as consumer prices rose 7.5% from January 2021 as of January 2022. As a result, the average cost of the basic necessities people need to live, or the cost of living, has increased, reducing the purchasing power of families across the country. But what is inflation and what causes it?

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What is inflation?
Inflation is the rate of increase in the prices of consumer goods, services, and the cost of living. This important financial event must be factored into each year’s earnings, spending, and savings plans.

Inflation can be determined by various means, but the most common for the US is the Consumer Price Index (CPI), which measures the average change in prices that urban consumers pay for a basic basket of goods and services. consumer services.

The CPI takes into account the costs of these consumer goods and services in various US cities and suburbs to identify price trends in the economy.

Factors that produce inflation
Various factors produce inflation.

The rate of inflation starts to rise when people are willing and able to pay a higher price for goods. This produces an increase in the production costs of raw materials and, ultimately, an increase in prices. This usually doesn’t happen immediately, but over a period of time, where price changes may seem insignificant at first.

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Need-or-want products and services are prone to inflation. The former category includes essentials such as food, real estate, utilities, and health care, while the latter might include luxury items such as jewellery and automobiles.

Other factors include:

demand inflation
It occurs when there is a rapid growth in the aggregate demand for consumer products and services, which produces an increase in their prices. This is usually the result of a strong economy, as costs rise because companies must increase their supply to meet new demand.

For this reason, and strange as it may seem, strong economic growth can cause problems if it produces high inflation. Although people with higher salaries may be able to adapt, this is difficult for people with fixed incomes.

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cost inflation
It is caused by rising labour and manufacturing costs, leading to high prices for consumer goods and services. Production costs could include wages and raw materials. The increase in manufacturing costs leads to a fall in the supply of goods and services, while the demand remains stable. Consumers are the ones who pay for the higher manufacturing costs by paying higher prices for the final product or service.

Real estate market inflation
It is the result of increased demand for housing in a booming economy. Just like the stock market, volatility has hit the real estate market recently. As more consumers pursue equity in the form of home ownership, buyers can expect a subsequent rise in home prices. This also applies to auxiliary products related to construction, such as wood, steel, etc.

The United States Federal Reserve and other central banks and their economists monitor inflation. The Federal Reserve maintains an inflation target of 2%, so it closely watches price increases and the rate of increase to adjust the country’s monetary policy to counteract inflation.

In other words, economists carefully watch the percentage change in prices and adjust rates to try to stabilize prices. However, they cannot set the prices; just hope that the rate changes end up achieving it accordingly.

Inflation is a concern for consumers because the money they earn and save decreases in value over time. As a result, people lose purchasing power.

Why is inflation rising?

Major world events cause inflation. For example, the COVID-19 pandemic triggered an erratic rise in inflation. Consumer demand dropped a lot during the initial phase of the pandemic. But it has increased since then, particularly as more people have shopped online.

This increased demand is accompanied by a crisis in the supply chain, as warehouses were overloaded and shipping ports were blocked, preventing products from being delivered. This meant shortages on the shelves.

In addition, the prices of homes for sale and rent have increased a lot. Many companies took advantage of the pandemic to enjoy the benefits of increased consumerism and consumer spending.

The federal government boosted the American economy with huge stimulus packages, worth billions of dollars, to qualifying families and small businesses during the pandemic. Subsequently, the Federal Reserve lowered its interest rates and bought bonds.

What are the effects of inflation?
Inflation affects both consumer prices and the cost of living. As inflation rises, so do the prices of consumer products and services, such as groceries, utilities, health care, and real estate. Rising prices for goods and services could reduce consumer spending, because many families spend much of their household income on these necessary items.

One of the indicators of inflation is its general impact on wages. Sadly, while many industries like hospitality are slowly but steadily recovering from losses sustained by the pandemic, wages have been slow to keep pace with inflation.

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