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  • Writer's pictureAntonise De Wet

Why is inflation so high and what is next?

The price of food, housing, and utilities have all seen significant hikes recently, pushing inflation close to a 40-year high.  Further if doing so could send the economy even closer to a recession, the Federal Reserve is seeking to reduce it by aggressively raising interest rates. However, as costs rise, many Americans are finding it more difficult to make ends meet.  While it is simple to observe and quantify these price fluctuations, it is more difficult to truly comprehend them. Inflation affects employment and wages among other factors besides expenses.

The anticipation that inflation might begin to drop is now beginning to materialize. According to the Labor Department, the consumer price index (CPI) for October increased 7.7% over the previous 12 months, which is 0.5% less than the number for September. To return price growth to normal, there is still a long way to go. The CPI increased 0.4% month over month in October, mirroring the monthly gain from September. More than half of the monthly increase was attributed to housing, while food and gas prices also rose. After falling for the previous three months, the price at the pump increased by 4% in the last month.

What causes inflation to remain so high?

It appears that practically everything is the answer.

When the economy sprang out of the pandemic slump two years ago, supply chain bottlenecks and parts shortages drove up the price of manufactured goods. Then, federal stimulus checks caused a spike in consumer spending. Then, as a result of Russia's invasion of Ukraine, gas and food supplies were disrupted, driving up prices.

As more individuals spend money on products or services that are in short supply to fulfill demand, producers start to hike prices.

According to Bivens, if everyone in the economy resolved tomorrow to spend every last dollar of their salaries without saving a penny, they would all rush to the stores to try to make purchases. "However, producers haven't generated enough to support that significant increase in overall spending. As a result, prices would increase."

The scarcity of manufacturers is another factor causing inflation. According to Bivens, prices would rise if there are insufficient workers to manufacture the in-demand commodity or service.

Who suffers from inflation?

Inflation can have a detrimental effect on whoever spends the most money on products or services. For instance, low- and moderate-income families suffer when gas or food prices rise because they spend a larger proportion of their income on these items.

What follows?

Fed policymakers expressed concern at their most recent meeting in late September that their rate increases would likely cause the economy to slow down for a long time, with growth coming in at "a below-trend pace in this and the following few years" and unemployment likely to increase.

When she said that "it will be a couple of years before inflation returns to the Fed's 2% goal," Federal Reserve Bank of Cleveland President Loretta Mester struck one of the hardest notes among central bankers this week. Mester stated, "We cannot even declare that inflation has peaked yet.


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