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Why the U S. inflation surge is accelerating, and when it may ease PBS NewsHour

Support our mission and help keep Vox free for all by making a financial contribution to Vox today. I would like to be able to tell you a coherent story about inflation where everyone absolutely agrees with all certainty what is going on. So instead, I’m going to pop through some theories that some economists say are contributing and others say are not. In April 2022, the Consumer Price Index increased 0.3% on a seasonally adjusted basis. But when compared to the year prior, the full index increased 10.8%, making it the largest year-over-year increase since November 1980.

  1. Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
  2. That’s because higher prices (and, therefore, higher interest rates) often knock out the competition, boosting the amount of inventory available.
  3. Even if the Fed doesn’t raise rates higher, they’re likely to remain elevated for an extended period.
  4. Changes in the prices of this basket, therefore, approximate changes in prices across the whole economy.
  5. Consumer prices soared in October 2021 and are now up 6.2% from a year earlier – higher than most economists’ estimates and the fastest increase in more than three decades.

A wage-price spiral can then be set in place as one factor feeds back into the other and vice-versa. Inflation can be a blessing and a curse, depending on how you look at it. On the one hand, governments and central banks plan for manageable price increases by setting inflationary targets and consumers respond by spending as prices tend to increase at a nominal rate.

Even if you toss out food and energy prices — which are notoriously volatile and have driven much of the price spike — so-called core inflation soared 5.9 percent, over the past year. We’d already seen the effect of supply chain issues and the pressure of commodity and energy prices prior to the war, Weber explained, but it has become worse in recent weeks. She noted that international cooperation would likely be needed to try to stabilize some commodity markets. The point of companies is to make money, so of course that’s what they’re doing right now, even with inflation. “Saying it’s corporate greed implies that we are surprised corporations are greedy, but that’s like complaining that tigers are hungry.


Mr. Duggan is also the author of the book “Beating Wall Street With Common Sense” and has contributed news and analysis to U.S. News & World Report, Seeking Alpha, and The Motley Fool. Mr. Duggan is a graduate of the Massachusetts Institute of Technology and resides in Biloxi, Mississippi.

Why is inflation so high? An economist explains why everyday essentials cost more

The Great Inflation signaled the need for public trust in the Federal Reserve’s ability to lessen inflationary pressures. “A lot of service prices fell as consumers weren’t traveling on airlines and going to hotels. In the past 12 months, many of those prices have rebounded,” says Gapen. “The unemployment rate is 3.6%. There’s a high demand for labor and strong wage gains. Labor is the number one input for services production. In general, it’s about half of any cost of production on the service job.” Consumer confidence tends to be high when unemployment is low, and wages are rising—leading to more spending. Economic expansion has a direct impact on the level of consumer spending in an economy, which can lead to high demand for products and services.

In the Euro area, prices climbed at an annual rate of 8.1% in May, led by countries that are close to Russia and relied on its oil and gas like Estonia, where prices were up 20.1%. Since US households were bolstered by the stimulus cheques, rising prices weren’t widely felt as a cost of living crisis last year, despite wage gains lagging. “These programmes… were a considerable infusion of liquidity into consumers’ pockets at a time when perhaps industry wasn’t quite ready to respond to an increase in demand,” he said in an interview in May. They “signified a big push of what I would call demand push inflation”. Many of the forces driving inflation last year – such as supply disruptions from Covid and higher food prices after severe storms and drought hurt harvests – were not unique to the US. At the same time, is consolidation the main thing behind inflation?

How does inflation today differ from historical inflation?

While most economists tend to acknowledge the same causes of inflation, many disagree which elements are most driving the price increases that continue to vex American consumers. The inflation rate has exceeded the 40-year high previously set in December, but what remains unclear to many is what is really causing that inflation and when it will come to an end. Obvious to many is that the pandemic has put its thumb on the economic scale, but what exactly is causing the purchasing power of the dollar to falter remains murky. Lenders can charge interest to offset the inflation likely to devalue repayments.

The result is higher prices for consumers without any change in demand for the products consumed. Cost-push inflation occurs when prices rise because production costs increase, such as raw materials and wages. The demand for goods is unchanged while the supply of goods declines due to the higher costs of production. As a result, the added costs of production are passed onto consumers in the form of higher prices for the finished goods. If inflation is one extreme of the pricing spectrum, deflation is the other. Deflation occurs when the overall level of prices in an economy declines and the purchasing power of currency increases.

Statistical agencies measure inflation by first determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. Higher rates also have a disproportionately negative impact on the high-growth technology sector. The Technology Select Sector SPDR Fund (XLK) is down 20.4% year to date. However, rising commodity prices have also produced record profits within the energy sector. Soaring oil and natural gas prices have helped the Energy Select Sector SPDR Fund (XLE) buck the bearish market trend and generate a 55.4% gain in 2022. Just as there are many causes of broad-based inflation, there are many factors that have given way to higher energy prices as well.

Wages also affect the cost of production and are typically the single biggest expense for businesses. When the economy is performing well, and the unemployment rate is eur usd trading low, shortages in labor or workers can occur. Companies, in turn, increase wages to attract qualified candidates, causing production costs to rise for the company.

As prices continue to increase across a broad range of spending categories, many Americans are finding that their paychecks aren’t going as far as they used to. That’s probably because in June, the year-over-year inflation rate, as measured by the Consumer Price Index, was a whopping 9.1%, the highest it’s been in over four decades. Still, he said, while the stimulus has had a positive effect on the economy, it came as the pandemic drove people to buy products rather than services.

Though energy commodities such as gasoline and services such as electricity are not weighted heavily in the Consumer Price Index, energy prices have also risen significantly, with gas prices increasing 60% year-over-year. Fresh wage and price data set for release on Friday are expected to show continued evidence of slow and steady moderation in March. Now Fed officials must judge whether the cool-down is happening fast enough to assure them that inflation will promptly return to normal — a focus when the central bank releases its next interest rate decision on Wednesday. The Federal Reserve, meanwhile, has signaled its intent to raise interest rates to address inflation. That would likely help tamp down consumer spending on large purchases and further aid in cooling down the economic situation.

The last few months have been a painful crash course on inflation. We’ve been forced to become quick learners as the price of rent, gas and other essentials have soared in the first half of 2022. Some countries in Europe, such as Spain and Portugal, have instituted price caps on gas – the kind of response that economists generally advise against, since caps tend to keep demand high by subsidising consumption. Even in the biggest economies, politicians are scrambling to find ways to offset the costs of inflation for households hit by the skyrocketing cost of living. Prof Reis said he is encouraged by steps the Federal Reserve, Bank of England and others have taken to tackle the problem, including raising interest rates. Furman, the Harvard economist, thinks the $1.9 trillion American Rescue Plan signed into law in early 2021 helped create some of the inflation we’re seeing now.

But others, including the head of the Federal Reserve, America’s central bank, argued that price increases would be “transitory” and fade as Covid-related supply chain issues abated. When monetary policy is too easy – either because the Federal Reserve sets the interest rate too low or because it increases money growth too rapidly – there will be an increase in inflation, as we are seeing now. This close relationship is grounded in economic theory and has been observed in practice in many countries around the world over many years.

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