High inflation, which had been an economic afterthought for decades, resurfaced with startling speed last year. The consumer price index of the Labor Department was only 1.7 percent higher in February 2021 than it was a year earlier. From there, year-over-year price hikes rapidly increased: 2.6 percent in March, 4.2 percent in April, 4.9 percent in May, and 5.3 percent in June. By October, the percentage had risen to 6.2 percent, and by November, it had risen to 6.8 percent.
At first, Fed Chair Jerome Powell and others dismissed increasing consumer costs as a “temporary” issue caused primarily by shipping delays and temporary supply and labor constraints as the economy recovered far faster than expected from the pandemic slump.
Many analysts now expect consumer inflation to remain elevated at least through this year, as demand continues to surpass supply in a variety of sectors.
And the Federal Reserve has made a significant shift in policy. Even as recently as September, Fed policymakers were split on whether or not to hike rates at all this year. However, the central bank indicated last month that it expected to hike its short-term benchmark rate, which is now at zero, three times this year to combat inflation. Many private economists predict that the Fed will raise rates four times in 2022.
Powell told the Senate Banking Committee on Tuesday, “If we have to raise interest rates more over time, we will.”
Is inflation a genuine thing?
The Bureau of Labor Statistics stated this week that the official inflation rate in October had risen to 6.2 percent, the highest level in decades. Some conspiracy theorists, on the other hand, believe that the genuine inflation rate is substantially higher. For example, self-help guru Jordan Peterson tweeted a chart on Wednesday claiming that the year-over-year inflation rate is nearly 15%, not 6%.
The graph is from the Shadow Government Statistics website. Its premise is that during the 1980s and 1990s, the Bureau of Labor Statistics undertook a series of methodological adjustments that consistently undervalued the true rate of inflation. If you calculate the inflation rate using old methodology from the 1980s, the genuine inflation rate is 6 to 8 percentage points higher than the official figures showand has been for decades, according to Shadowstats.
In some bitcoin circles, this line of thought has gained traction. Bitcoin enthusiast and Twitter CEO Jack Dorsey, for example, tweeted about it last week:
However, the chart’s inventor, economist and Shadowstats founder John Williams, has confessed that he does not recalculate the inflation rate using older methods. He takes the official inflation rate and adds a fudge factor that represents his estimate of how much the official consumer price index (CPI) understates the genuine inflation rate.
The issue is that Williams’ adjustment is far larger than it needs to be. The BLS has changed its methodology throughout time, but the sum of those modifications is likely to have affected the measured yearly inflation rate by a fraction of a percentage point, not the 6 to 8 percentage points Williams asserts.
On Monday and Tuesday, I spoke with Williams on the phone. In both calls, he held firm in his assessment. He emphasized that all he’s doing is relying on the government’s own estimations of how methodological changes have affected the official inflation rate.
His calculations, however, appear to be founded on a basic arithmetic error, as we will demonstrate. They are also contradictory to common sense.
What will cause inflation in 2021?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
Why is inflation so high at the moment?
It’s been four decades since we’ve seen such rapid price increases, so it’ll be interesting to see how customers react to this.
Take a look at this graph to see how people expect their financial conditions to change in the next 12 months:
The number of those who believe their financial condition will worsen in the coming year is at an all-time high.
The economy is thriving. Wages are on the rise. The cost of living has skyrocketed. It’s also never been easier to find work.
On a daily basis, more people are slipping behind. And because we Americans love to spend money, those higher prices are right in front of us every time we swipe our credit cards. Consumer sentiment is suffering as a result of inflation.
It’s never as simple as a single variable when dealing with something as complex as the $23 trillion US economy.
1. A stimulus package worth trillions of dollars. I understand that some investors want to blame the Fed for everything, but this is more of a fiscal policy issue than a monetary policy issue.
Governments all across the world poured trillions of dollars into the system to keep the global economy afloat during the pandemic. We spent around $7 trillion in the United States alone.
If you’re a political junkie, you’ll most likely blame the current president (or defend him). However, the majority of the spending was necessary, and the first spending bill had bipartisan support. It was a life-or-death crisis.
The alternative is obviously far worse than what we have now, but those trillions of dollars have made a significant impact on the economy.
2. The epidemic is causing supply chain disruptions. This week’s New York Times had an article about a garage door shortage:
Previously, just a few people had difficulty obtaining them. Now it appears that everyone has the same issue. In the last year, prices have doubled or tripled. Lead times have gotten longer, ranging from weeks to months. Garage doors are increasingly being ordered before the foundation is built by homebuilders who used to order them several weeks before building a house.
“It used to take us 20 weeks to build a house,” said Adrian Foley, president and chief executive officer of Brookfield Properties, which builds thousands of single-family houses across North America each year. “We now have to wait 20 weeks for a pair of garage doors.”
It appears that a combination of steel shortages, spray-foam insulation shortages, and parts from China has made shipping new garage doors more difficult than ever.
Whether it’s appliances, vehicle components, new cars, or some other new spot where the supply chain is interrupted, everyone has dealt with it.
Supply chains have been devastated by labor shortages, Covid, and growing demand for goods.
When there is a shortage of supply and demand stays high, it is a surefire way for prices to rise.
3. Corporations are taking advantage of this. Because corporations are struggling with increased commodity prices, supply chain challenges, and pay increases, inflation should have an influence on their bottom line.
But, let’s be honest, most businesses are doing OK. Take a look at their margins (photo courtesy of Yardeni Research):
How can you explain increased margins if firms are having such a hard time dealing with inflation?
Chipotle CEO Brian Niccol told analysts that the business has hiked prices by 6% this year and is encountering no consumer resistance:
If we don’t see a reduction in the price of beef, freight, and some of these other items, we’ll have to accept some additional pricing. So it’s the absolute last thing we want to do, but we’re lucky enough to be able to pull it off. And, for the moment, we don’t see much resistance at these levels.
These dreadful businesses. They don’t want to raise costs, but since consumers don’t appear to mind, they don’t have a choice but to do so.
I can’t say I blame them. They’re watching out for their investors. CEOs, on the other hand, don’t have to make a difficult decision.
They enjoy boosting prices when they can since there’s no chance they’ll cut prices even if inflation falls.
4. Consumers are blowing their budgets. This retail sales graph is a sight to behold:
Consider how much higher retail sales are now than they were prior to the outbreak.
But, Ben, it’s clear that this is all due to inflation. What if you increase retail prices by adjusting retail sales?
Even after accounting for inflation, these figures have increased dramatically since the outbreak.
The Wall Street Journal just published an article about Chanel handbags. These are high-end things that sold for absurdly high prices before the epidemic, such as $5,200 for a little pocketbook in 2019.
They hiked costs three times last year alone, so I guess it wasn’t high enough. A Chanel Classic Flap purse is now available for the low, low price of $8,200.
Price rises are being blamed on rising production and raw material costs, but come on.
“Everyone in the luxury industry is boosting prices,” said John Idol, chief executive officer of Capri Holdings Ltd., which owns Michael Kors, Jimmy Choo, and Versace. “We’ve had no consumer reaction to any of the price hikes we’ve implemented, and there will be more.”
I don’t mind condemning corporations for being greedy, but consumers aren’t blameless either.
It aids in the rehabilitation of people’s balance sheets. Households have worked off debt, watched their home values rise, seen their 401k balances soar (until this year), and spent money like it was going out of style.
So, while we all whine about inflation, the majority of us are willing to pay greater costs anyway.
Everyone is unhappy about inflation, yet we can’t help but pay greater prices because spending is something we do exceptionally well in this country.
- Defying inflation, diversifying your investments, and streamlining your finances (All the Hacks)
What is the current state of inflation in 2022?
Inflation in the United States is expected to hit a new 40-year high. The annual inflation rate in the United States is anticipated to grow to 7.9% in February 2022, the most since January 1982, and core inflation to 6.4 percent, the highest in 40 years. The monthly rate is 0.8 percent, which is higher than the 0.6 percent reported in January.
RELATED: Inflation: Gas prices will get even higher
Inflation is defined as a rise in the price of goods and services in an economy over time. When there is too much money chasing too few products, inflation occurs. After the dot-com bubble burst in the early 2000s, the Federal Reserve kept interest rates low to try to boost the economy. More people borrowed money and spent it on products and services as a result of this. Prices will rise when there is a greater demand for goods and services than what is available, as businesses try to earn a profit. Increases in the cost of manufacturing, such as rising fuel prices or labor, can also produce inflation.
There are various reasons why inflation may occur in 2022. The first reason is that since Russia’s invasion of Ukraine, oil prices have risen dramatically. As a result, petrol and other transportation costs have increased. Furthermore, in order to stimulate the economy, the Fed has kept interest rates low. As a result, more people are borrowing and spending money, contributing to inflation. Finally, wages have been increasing in recent years, putting upward pressure on pricing.
Do Stocks Increase in Inflation?
When inflation is high, value stocks perform better, and when inflation is low, growth stocks perform better. When inflation is high, stocks become more volatile.
Inflation favours whom?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
Is inflation bad for business?
Inflation isn’t always a negative thing. A small amount is actually beneficial to the economy.
Companies may be unwilling to invest in new plants and equipment if prices are falling, which is known as deflation, and unemployment may rise. Inflation can also make debt repayment easier for some people with increasing wages.
Inflation of 5% or more, on the other hand, hasn’t been observed in the United States since the early 1980s. Higher-than-normal inflation, according to economists like myself, is bad for the economy for a variety of reasons.
Higher prices on vital products such as food and gasoline may become expensive for individuals whose wages aren’t rising as quickly. Even if their salaries are rising, increased inflation makes it more difficult for customers to determine whether a given commodity is becoming more expensive relative to other goods or simply increasing in accordance with the overall price increase. This can make it more difficult for people to budget properly.
What applies to homes also applies to businesses. The cost of critical inputs, such as oil or microchips, is increasing for businesses. They may want to pass these expenses on to consumers, but their ability to do so may be constrained. As a result, they may have to reduce production, which will exacerbate supply chain issues.
What is the cause of inflation?
Inflation in the United States is at its highest level in nearly four decades this fall, with a year-over-year increase of 6.8% in November. Because of persistent supply and labor shortages, as well as high demand, consumers are seeing prices for a variety of goods and services rise dramatically.
Inflation is one of the most difficult problems facing economists and political policymakers, from Federal Reserve officials who set interest rates to the Biden administration and Congress. It is fueled by economic imbalances caused by the Covid-19 pandemic. The reasons are numerous, and the measures commonly used to alleviate price pressures might, in certain cases, send the economy into recession.
Is increased money printing causing inflation?
There are two basic causes of hyperinflation: an increase in the money supply and demand-pull inflation. When a country’s government starts producing money to pay for its spending, the former occurs. As the money supply expands, prices rise in the same way that traditional inflation does.