Why is inflation still so high right now, and when can we expect it to finally stop?

Why is inflation still so high right now, and when can we expect it to finally stop?

Why is inflation still so high right now, and when can we expect it to finally stop?

Why is inflation still so high right now, and when can we expect it to finally stop?

By the end of 2022, inflation will be the key word of the year. Not just in the United States, but around the world.

Don’t lose

US inflation has moderated slightly for the second consecutive month, reaching 8.3% in August. This is the lowest figure in four months, and a 40-year high of 9.1% earlier this year.

But Americans are still seeing rising prices almost everywhere they look, and some sectors have been hit harder than others. The cost of energy and gas fell by 5% month on month but food prices rose sharply.

“The food index increased 11.4% over the past year, the largest 12-month increase since the period ending May 1979,” says the Bureau of Labor Statistics.

The Federal Reserve enacted its second consecutive 0.75 percentage point interest rate hike in late July in hopes of easing inflation. But what really causes prices to rise in the first place, and what will it take to stop it?

What are the causes of inflation?

There are four general causes of inflation. The most commonly recognized causes are:

  • demand-pull inflation

  • cost-push inflation

  • built-in inflation

The fourth reason is an increase in the money supply, due to the Federal Reserve printing more.

Demand-pull inflation which occurs when consumer demand pulls prices up. An example of prices going up due to aggregate demand is rising house prices, especially in popular areas. For example, home prices in Portland, Ore., ranked as one of the hottest markets in the country, increased 117% from an average of $176,325 in 2002 to an estimated $383,482 in 2020.

Cost-push inflation which occurs when the cost of producing the items rises, pushing the prices higher. An example of cost-push inflation is what we saw during the pandemic.

The advent of COVID-19 has led to disruptions in the supply chain, labor shortages and ultimately increased costs of producing goods and providing services. The world’s economies are still recovering from this effect, and this is one of the reasons for this inflation.

Built-in inflation or spiraling wage prices where workers demand higher wages to keep up with rising living costs. This will also encourage firms to raise their own prices, causing a circular effect.

The history of inflation in the United States

US inflation chart

Money

Does an increased money supply cause inflation?

There is debate as to whether or not the Federal Reserve printing more money could lead to inflation.

Powell still believes that inflation and the money supply are unrelated but he has fierce critics who think otherwise.

Steve H. Hanke – professor of applied economics at Johns Hopkins University – said that the money supply is growing 13% per year.

Until the pandemic, supply had not increased this much since the late 1970s. Hanke added that even if the Fed acts quickly to halve that increase, annual inflation will be above six percent through 2024.

However, the Feds increased the money supply by more than 120% in 2008/09, and the increase was not caused by inflation.

The effect of monetary policy

During the pandemic, stimulus checks were introduced to help keep the economy energized. With three rounds of stimulus checks, the US government has given more than 472 million payments or $803 billion in total financial relief to those affected by the pandemic.

To continue stimulating economic activity, the Feds also lowered their rates.

However, some critics claim that while the stimulus bills were necessary, they contributed to the inflation we know today.

And this also explains why some economists believe that monetary policy leads to inflation.

“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can only be produced by a more rapid increase in the quantity of money than in output,” said the late economist and Nobel laureate Milton Friedman once.

Why is inflation so high at the moment?

The main reasons for the current inflation in the US are the persistence of supply disturbances and shortages of food products, which started with the pandemic. In addition, the higher energy prices affect inflation. The USA is not the only country that has experienced this.

UK inflation fell from 10.1% in July to 9.9% in August following a fall in petrol prices. However, it is still high.

Canadian inflation also slowed to 7.6% in July, but is still well above the Bank of Canada’s 2% target. Gas prices are dropping but inflated food prices are still affecting families.

Some countries are in much worse inflationary trouble. In Argentina, inflation stands at 64% and is expected to hit 95% by the end of 2022. In Turkey, it is almost 80%. Inflation is not only the result of predictable economic changes, but also geopolitical events that create ripple effects, such as COVID-19 and the Russian invasion of Ukraine.

As a result of the Russian invasion of Ukraine, and many countries imposing sanctions on the gas exporter Moscow, the world felt the commodity shock when energy prices rose high and reached new records. This explains why energy prices have reached record highs in many parts of the world.

When will inflation fall?

Overall, the August results show that prices began to decline in key areas, such as gas or airfares, indicating that inflation had probably peaked. However, the underlying issues causing this inflation have not yet been resolved.

In its post-COVID-19 indicators, supply chain firm Flexport said “overall consumer preferences for goods over services will decline but remain slightly above summer 2020 and pre-pandemic levels.”

In August, Art Hogan, managing director and chief market strategist at B. Riley Financial, told Forbes that he believes this inflationary period could end by mid-2023.

“Prices are falling and that will help shorten the inflationary cycle,” he says. “Both costs and shipping times have been significantly reduced.”

However, financial services company Edward Jones estimates that inflation should begin to moderate by the end of 2022.

Additionally, there may be some silver linings for US supply chains as US executives are currently considering different ways to re-pivot and deal with these supply chain issues.

According to the Dodge Construction Network, construction of new manufacturing facilities in the US has risen 116% over the past year, dwarfing the 10% gain on all construction projects combined. However, it gets complicated with the labor shortage and more baby boomers retire

Tips to fight inflation

There are four main ways you can fight inflation in your everyday life.

Cut discretionary spending. Obviously, inflation requires cutting back on discretionary or unnecessary spending and tracking your income.

Bring in more income. Those who are tight on cash or want to save more money can take on an extra job.

Take advantage of high interest rates. However, those who have some money to spare can invest in high interest savings accounts or term deposits if possible.

Eliminate your debt. Also, when the interests are up, it is recommended to refinance any existing variable rate debt.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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