Inflation in the United States: what you need to know

The government announced on Friday that consumer price climbed 8.6% in the year to May, the fastest rate of increase in four decades. ...

The government announced on Friday that consumer price climbed 8.6% in the year to May, the fastest rate of increase in four decades.

Americans are facing more expensive food, fuel and housing, and some are seeking answers on what is causing the price spike, how long it could last and what can be done to fix it.

There are few easy answers or painless fixes when it comes to inflation, which has surged around the world as supply shortages collide with strong consumer demand. It’s hard to predict how long today’s price spike will last, and the main tool to combat it is rising interest rates, which dampen inflation by slowing the economy – potentially sharply.

Here’s a guide to understanding what’s going on with inflation and how to think about price gains when navigating this complicated time in the US and global economy.

It may help to think of the causes of current inflation as falling into three related categories.

  • Strong demand. Consumers spend big. At the start of the pandemic, households accumulated savings while stuck at home, and government support that continued through 2021 helped them save even more money. Now people are taking jobs and getting raises. All of these factors have padded domestic bank accountsallowing families to spend everything from backyard barbecues and beach vacations to cars and kitchen tables.

  • Too few goods. As families took pandemic savings and tried to buy vans and computer screens, they ran into a problem: there was too little merchandise for everyone. Pandemic-related factory closures, global shipping backlogs and reduced production have snowballed into a shortage of parts and products. Because demand outstripped the supply of goods, businesses were able to charge more without losing customers.

    Now China last confinements exacerbate supply chain problems. At the same time, the war in Ukraine is reducing the global supply of food and fuel, pushing up global inflation and fueling the cost of other goods and services. Gas prices are average around $5 a gallon nationwide, up from just over $3 a year ago.

  • Service sector pressures. More recently, people have been shift their expenses away from things and back to experiences as they adjust to life with coronavirus – and inflation has been bubbling in service industries. Rents are rising rapidly as Americans compete for a limited supply of apartments, restaurant bills rise as food and labor costs rise, and airline tickets and hotel rooms rise. hotels cost more because people are eager to travel and fuel and labor are more expensive.

You might be wondering: what role does corporate greed play in all of this? It is true that companies have been making unusually large profits because they raise prices more than is necessary to cover rising costs. But they’re able to do this partly because demand is so high – consumers are spending all the way to price increases. It is unclear how long this pricing power will last. Some companies, like Targethave already signaled that they will start cutting prices on some products as they try to eliminate inventory and retain customers.

Economists and policymakers are keeping a close eye on the two main indicators of US inflation: Consumer price indexwhich was released on Friday, and the Personal Consumption Expenditure Index.

The CPI captures how much consumers are paying for the things they buy, and it’s coming out earlier, making it the country’s first clear look at what inflation has done in the previous month. Index data is also used to derive PCE figures.

The PCE index, which will be released on June 30, tracks how many things actually costs. For example, it counts the cost of health care procedures even when government and insurance help pay for them. It tends to be less volatile and is the index the Federal Reserve looks to when trying to achieve inflation averaging 2% over time. In April, the PCE index was climb 6.3 percent compared to the previous year – more than three times the central bank’s target.

Fed officials pay close attention to month-to-month changes in inflation to get a sense of its momentum.

Policymakers are also paying particular attention to the so-called measure of core inflation, which excludes food and fuel prices. While groceries and gasoline make up a large portion of household budgets, their prices are also rising in response to changes in global supply. As a result, they don’t give as clear a reading of the underlying inflationary pressures in the economy – those that the Fed thinks it can do something about.

“I will look to see a consistent series of decelerating monthly impressions on core inflation before feeling more confident that we arrive at the type of inflation path that will bring us back to our 2% target,” said Lael Brainard, Vice Chair of the Fed and one of its top public messengers, during an interview with CNBC last week.

No one can guess how long prices will continue to climb rapidly: Inflation has baffled experts many times since the pandemic took hold in 2020. But based on the factors driving the hot prices of today, a few outcomes seem likely.

On the one hand, it seems unlikely that rapid inflation will go away entirely on its own. Wages are rising much faster than normal. This means that unless companies suddenly become more efficient, they will likely try to keep raising prices to cover their labor costs.

As a result, the Fed raises interest rates to slow demand and dampen wage and price growth. The policy response from the central bank means the economy is almost surely heading for a slowdown. Already, higher borrowing costs have started to cooling the housing market.

The question – and the big uncertainty – is how much action the Fed will take to bring inflation under control. If America is lucky and supply chain shortages ease, the Fed might be able to gently let the economy down, slowing the labor market enough to temper wage growth without triggering a recession.

In this optimistic scenario, often called a soft landing, companies will be forced to lower prices and cut big profits as supply and demand balance out and they compete for customers again.

But it’s also possible that supply issues will linger, leaving the Fed with a more difficult task: raise rates more drastically to dampen demand enough to rein in rising prices.

“The path to a soft landing is very narrow – narrow to the point where we expect a recession as a benchmark,” said Matthew Luzzetti, chief US economist at Deutsche Bank. That’s partly because consumer spending shows few signs of cracking so far.

Households still have about $2.3 trillion in excess savings to help them weather higher rates and prices, Luzzetti’s team estimated.

“There continue to be deep pockets of pent-up demand,” Anthony G. Capuano, chief executive of hotel company Marriott International, said at a June 7 event. “Unlike previous business cycles and economic downturns, you have this added dimension here that people have been locked in for 12 to 24 months.”

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Newsrust - US Top News: Inflation in the United States: what you need to know
Inflation in the United States: what you need to know
Newsrust - US Top News
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