Info Tips News – Causes of US Inflation and How to Measure It. The first question is what is inflation? Inflation is the annual change in prices, a loss of purchasing power. This means the value of one dollar today will probably not go as far compared to the next day’s value. The causes of US inflation may vary, but the result will still be affecting the population.
Inflation in general can be caused by the result of rising consumer demand. But also, the rise and fall of something major’s development that might not be connected with the economic condition, such as problems in the supply chain or limited oil production.
This situation can be hard for people, especially for poor households that will need more budget to get the usual necessities. Such as food, gas, and housing.
US Inflation
Americans are facing more expensive food, housing, and fuel. Many people have been wondering what causes of US inflation, how long it will last, and what can be done to resolve this situation.
It is difficult to predict how long this situation will last and the main tool to resolve this is increasing the interest rate. Making the economy go slower will cool the inflation. Here is some explanation of the causes of US inflation:
1. Strong Demand
Early in the pandemic era, most consumers were spending big. Everybody is stuck at home, and they are saving money. Now people can go back to taking jobs, then get wage increases, and all these factors give many people the ability to spend more on things they like.
Unfortunately, not all of these demands can be met. Due to the pandemic, many businesses were closed, globally. This affected the prices of things. This means even though people have the ability to spend more, the price will be higher.
Buying things is more expensive than before. Going on vacation is also spending a lot more money on transportation, services, and so on. The people’s strong demand for goods and services was met by the rise in prices.
2. Not Enough Goods
Even though people may have a lot of savings and want to buy many things, they face a problem. There are not enough goods to have. This is due to the factory’s shutdowns, shipping backlogs globally, and reduced quantity in production.
All these resulted in a shortage of parts and products. In the end, companies can charge more without the worry of losing customers. Customers also spend more because of this shortage.
The war in Ukraine is cutting the supply of fuel and food for the world. Added to that, China also implied lockdowns due to the pandemic. All these have made inflation higher. Gas prices in the US went up from just over $3 a year ago to around $5 today (more than a 50% hike up).
3. Pressure from the Service Sector
The limited supply of apartments made the rent price climb up. With the rise of labor and food costs, restaurants’ bills are also getting higher. Labor and fuel are more expensive and that caused the price hike in airline tickets and hotel rooms.
The service sector companies seem to get a big profit because of all this. But it is unclear how long this situation will last. Some companies like Target, have already begun to reduce prices on some products. They try to clear out inventory and try not to lose customers.
The service sector also absorbed a lot of labor. So far, this sector is stable enough. Again, it is unclear whether this stability will last. This caused some concerns due to the huge labor that will be affected.
4. Supply Chain Crisis
The pandemic surely caused shortages in parts and products in general. The whole world still has not reached a stable condition because of it. This caused a supply chain crisis around the world.
This situation was worsened by the strong customer demand and the improved financial conditions after the pandemic. This combination is attributed to the causes of US inflation, said some economists.
The pandemic has caused many factory shutdowns all around the world. This means the demand for supply was disrupted. Even though the situation is getting a bit more stable this year, the supply demand is still not fulfilled yet.
This crisis will be quite hard to overcome since the supply comes to the US from all over the world. As long as this supply crisis continues, inflation in the US will continue to be a concern.
5. Monetary Policy
The Federal Reserve has kept a much lower interest rate than in other recent years. 2.33% lower than the inflation rate, which is up to 7-8%. This large discrepancy is a repeat of the 1970s inflation.
The most effective way to overcome this is to increase the interest rate. This will reduce the inflation rate. Hopefully can bring it back down to the target of 2% per year.
How to Measure Inflation
The US has two primary inflation gauges. One is the Consumer Price Index or CPI and the other one is the Personal Consumption Expenditures index or PCE index.
1. The CPI
This index looks at how much consumers pay for the things they purchase. This can give people a glimpse at what the inflation caused the month before.
By October 2022, the Labor Department reported the CPI for October rose 7.7% over the 12 months before. On a monthly basis, the CPI rose 0.4% in October as the monthly increase in September.
Housing is the responsible sector for more than half of this monthly increase. The price of fuel also jumped 4% over the last month.
2. The PCE Index
According to the report made by the Commerce Department, the core of Personal Consumption Expenditures, or PCE price index, was up in October by 5.1%. This is representing a hike up over the recent months.
The Fed is raising interest rates to slow people’s demand and as an effort to tamp down the growth in price and wage. This policy means that the economy can be said to head for a slowdown.
As the US central bank, The Fed is facing a big challenge with soaring inflation. The Fed’s important job is to keep inflation under control in order to keep the economy stable. Moreover, it needs to help the job market grow as much as possible.
The causes of US inflation are probably the same causes experienced by other countries in the world. Since the pandemic, the world has changed and even though the situation is continuing to get better, stability is still a big issue.
