What’s Driving US Inflation So High?
Brian Wallace, Founder & President,NowSourcing
In 2021, the US Consumer Price Index (CPI) rose 6.8%. This figure is higher than anything America has seen in 30 years. To understand what this means, consider what the CPI measures. Included in the CPI is a basket of goods deemed relevant to the average American consumer. It includes food, clothing, healthcare, transportation, and so on. In 2021, food prices rose 8.3%. Clothing costs increased 5.6%. Healthcare is 6% more expensive than it was before. Most shockingly, used cars (a form of transportation) rose 29.7% in price. It costs more money to maintain the same standard of living than it did a year ago.
What is causing inflation in the United States? There are two major theories surrounding the causes of inflation, and both are applicable to the current situation. The first theory, demand-pull, states that prices rise when demand outpaces the availability of products. Since coming out of lockdown, US consumers have demanded more goods than they did during quarantine. Producers do not have the supply necessary to meet their demands, and so prices become bid up. The second theory, cost-push, states that higher production costs get passed onto consumers in the form of higher prices. Many inputs used to make goods (like timber) have risen in cost during 2021. Producers pay more to make the same number of goods. Supply chain breakdowns also increase the costs of shipping. To make back the additional expenses, producers raised prices on their end consumers.
The US Federal Reserve does have tools it can use to rein in inflation. It could sell more bonds, thereby removing some money from circulation. It can also raise interest rates through the central bank, making it more expensive to borrow. The reason the Federal Reserve may be hesitant to tackle inflation now is because both tools have the potential to cause recessions. The US just left a recession in 2020. The impact of job losses is severe. One of the important links in the chain of events that caused the 2008 recession was monetary policy aimed at curbing inflation.
How can individual consumers protect the value of their money? Instead of saving money in the bank, investors should look into projects with a return above the inflation rate. Stocks, real estate, and commodities all have the power to beat inflation if one invests wisely. Protecting finances from inflation can be difficult.
Source: Expensivity
About the Author:
Brian
Wallace
is the Founder and President of
, an industry leading infographic design agency in Louisville, KY and Cincinnati, OH which works with companies ranging from startups to Fortune 500s.
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