Inflation is a fact of life in the United States today, yet the pace of inflation varies greatly across the country. Various consumer preferences and demand levels, COVID-inspired migrations from urban to suburban areaswhich drives up demand in some regions while lowering demand in othersand transportation costs determined by geography and distance from suppliers all contribute to regional variation in inflation.
Figure 1 shows the average monthly cost of inflation by location to show how rising costs are affecting Americans today. Monthly inflation rates, each relative to January 2021, are multiplied by average monthly household spending, which varies by area, to determine the extra monthly cost to households. The result indicates how much rising prices would raise monthly family costs in 2021.
As inflation rises, so does the monthly cost to American familiesadded expenditures that will continue to be borne by Americans in the future, regardless of whether inflation returns to normal levels now that price levels have migrated upward permanently.
Figure 1: Average Monthly Inflation Costs per Household by Census Division, January 2021
Calculations by the JEC. Consumer Price Indices (CPI) are obtained for each of the nine Census divisions for each month of 2021, and the percent change in CPI from January 2021 is applied to average monthly household expenditure data across the four Census regions. The average monthly household spending of households in different divisions within the same region is considered to be the same. Because the statistics on household spending is based on a two-year average from 2019 to 2020, this research is likely to underestimate total spending in 2021 as well as the monthly cost of inflation per Census division. The Bureau of Labor Statistics provides both CPI and consumer spending data.
Last year, the average household inflation cost increased from over $100 in April 2021, when the annual inflation rate first began to accelerate, to almost $380 in January 2022, when it reached 7.5 percent. Utah, Colorado, Arizona, New Mexico, Montana, Idaho, and Wyoming have the highest inflation rates in the country, with over $500 in additional family prices in January. The East South Central region, which includes Kentucky, Tennessee, Mississippi, and Alabama, has the lowest monthly inflation prices due to lower inflation rates and average spending levels. As of January 2022, monthly inflation costs for households in the remaining regions range from $350 to $400.
The following interactive map breaks down yearly inflation rates in January 2022 by region to give you a clearer idea of how inflation differs across the country. With an annual rate of 9.0 percent, the Mountain West has the highest inflation, owing mostly to rising home and rent prices; shelter costs in the mountain area are rising nearly twice as fast as the national average. States in the Midwest and South have the highest inflation rates, about 7.9%, while states in the Northeast have lower inflation rates, at 6.1 percent to 6.6 percent. While the Northeast has the lowest inflation rate in comparison to the rest of the country, it still has historically high inflation, with prices rising more than three times faster than the Federal Reserve’s objective of 2.0 percent.
Annual Inflation Rates and Monthly Household Inflation Costs by Census Division, January 2022 Figure 2: Annual Inflation Rates and Monthly Household Inflation Costs by Census Division, January 2022
What is the current inflation rate for 2021?
The United States’ annual inflation rate has risen from 3.2 percent in 2011 to 4.7 percent in 2021. This suggests that the dollar’s purchasing power has deteriorated in recent years.
Why is inflation in 2022 so high?
As the debate over inflation continues, it’s worth emphasizing a few key factors that policymakers should keep in mind as they consider what to do about the problem that arose last year.
- Even after accounting for fast growth in the last quarter of 2021, the claim that too-generous fiscal relief and recovery efforts played a big role in the 2021 acceleration of inflation by overheating the economy is unconvincing.
- Excessive inflation is being driven by the COVID-19 epidemic, which is causing demand and supply-side imbalances. COVID-19’s economic distortions are expected to become less harsh in 2022, easing inflation pressures.
- Concerns about inflation “It is misguided to believe that “expectations” among employees, households, and businesses will become ingrained and keep inflation high. What is more important than “The leverage that people and businesses have to safeguard their salaries from inflation is “expectations” of greater inflation. This leverage has been entirely one-sided for decades, with employees having no capacity to protect their salaries against pricing pressures. This one-sided leverage will reduce wage pressure in the coming months, lowering inflation.
- Inflation will not be slowed by moderate interest rate increases alone. The benefits of these hikes in persuading people and companies that policymakers are concerned about inflation must be balanced against the risks of reducing GDP.
Dean Baker recently published an excellent article summarizing the data on inflation and macroeconomic overheating. I’ll just add a few more points to his case. Rapid increase in gross domestic product (GDP) brought it 3.1 percent higher in the fourth quarter of 2021 than it had been in the fourth quarter of 2019. (the last quarter unaffected by COVID-19).
Shouldn’t this amount of GDP have put the economy’s ability to produce it without inflation under serious strain? Inflation was low (and continuing to reduce) in 2019. The supply side of the economy has been harmed since 2019, although it’s easy to exaggerate. While employment fell by 1.8 percent in the fourth quarter of 2021 compared to the same quarter in 2019, total hours worked in the economy fell by only 0.7 percent (and Baker notes in his post that including growth in self-employed hours would reduce this to 0.4 percent ). While some of this is due to people working longer hours than they did prior to the pandemic, the majority of it is due to the fact that the jobs that have yet to return following the COVID-19 shock are low-hour jobs. Given that labor accounts for only roughly 60% of total inputs, a 0.4 percent drop in economy-side hours would only result in a 0.2 percent drop in output, all else being equal.
How much has the value of the dollar risen since 1980?
In terms of purchasing power, $1 in 1980 is comparable to around $3.14 in 2020, a $2.14 rise over 40 years. Between 1980 and 2020, the dollar saw an average annual inflation rate of 2.90 percent, resulting in a total price increase of 214.09 percent.
How is inflation beneficial?
Inflation is and has been a contentious topic in economics. Even the term “inflation” has diverse connotations depending on the situation. Many economists, businesspeople, and politicians believe that mild inflation is necessary to stimulate consumer spending, presuming that higher levels of expenditure are necessary for economic progress.
How Can Inflation Be Good For The Economy?
The Federal Reserve usually sets an annual rate of inflation for the United States, believing that a gradually rising price level makes businesses successful and stops customers from waiting for lower costs before buying. In fact, some people argue that the primary purpose of inflation is to avert deflation.
Others, on the other hand, feel that inflation is little, if not a net negative on the economy. Rising costs make saving more difficult, forcing people to pursue riskier investing techniques in order to grow or keep their wealth. Some argue that inflation enriches some businesses or individuals while hurting the majority.
The Federal Reserve aims for 2% annual inflation, thinking that gradual price rises help businesses stay profitable.
Understanding Inflation
The term “inflation” is frequently used to characterize the economic impact of rising oil or food prices. If the price of oil rises from $75 to $100 per barrel, for example, input prices for firms would rise, as will transportation expenses for everyone. As a result, many other prices may rise as well.
Most economists, however, believe that the actual meaning of inflation is slightly different. Inflation is a result of the supply and demand for money, which means that generating more dollars reduces the value of each dollar, causing the overall price level to rise.
Key Takeaways
- Inflation, according to economists, occurs when the supply of money exceeds the demand for it.
- When inflation helps to raise consumer demand and consumption, which drives economic growth, it is considered as a positive.
- Some people believe inflation is necessary to prevent deflation, while others say it is a drag on the economy.
- Some inflation, according to John Maynard Keynes, helps to avoid the Paradox of Thrift, or postponed consumption.
When Inflation Is Good
When the economy isn’t operating at full capacity, which means there’s unsold labor or resources, inflation can theoretically assist boost output. More money means higher spending, which corresponds to more aggregated demand. As a result of increased demand, more production is required to supply that need.
To avoid the Paradox of Thrift, British economist John Maynard Keynes argued that some inflation was required. According to this theory, if consumer prices are allowed to decline steadily as a result of the country’s increased productivity, consumers learn to postpone purchases in order to get a better deal. This paradox has the net effect of lowering aggregate demand, resulting in lower production, layoffs, and a faltering economy.
Inflation also helps borrowers by allowing them to repay their loans with less valuable money than they borrowed. This fosters borrowing and lending, which boosts expenditure across the board. The fact that the United States is the world’s greatest debtor, and inflation serves to ease the shock of its vast debt, is perhaps most crucial to the Federal Reserve.
Economists used to believe that inflation and unemployment had an inverse connection, and that rising unemployment could be combated by increasing inflation. The renowned Phillips curve defined this relationship. When the United States faced stagflation in the 1970s, the Phillips curve was severely discredited.
Is inflation reaching new heights?
Inflation surged to 7.5 percent year over year in January 2022, the highest rate in 40 years, according to the Consumer Price Index (CPI). Price hikes exceeded expectations: Economists had predicted a 7.3 percent increase year over year. Stocks fell as a result of the news, while bond rates soared to multi-year highs.
What will be the rate of inflation in 2022?
According to a Bloomberg survey of experts, the average annual CPI is expected to grow 5.1 percent in 2022, up from 4.7 percent last year.