The government reported on Friday that consumer prices rose 8.6% in the year to May. This is the fastest rate of increase in 40 years.
Americans are faced with more expensive food, fuel and housing and figure out the answer to what is causing the price surge, how long it will last, and what can be done to solve it. Some people are doing it.
There are few simple answers or painless solutions to inflation, which is skyrocketing around the world as supply shortages clash with hot consumer demand. It is difficult to predict how long inflation will last today, and the main tool to combat it is rising interest rates, which cool inflation by slowing the economy-potentially sharp.
This is a guide to understanding what is happening with inflation and a way to think about rising prices as you navigate this complex moment in the US and global economies.
What is driving inflation
It may be helpful to think of the causes of inflation today as being classified into three related buckets.
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Strong demand. consumer Spend big. In the early days of the pandemic, households were trapped in their homes, accumulating savings, and with government support that lasted until 2021, they were able to get rid of even more money. Now people are taking on jobs and winning wages are rising.All of those factors have Padded household bank accountAllows families to spend everything from backyard grills and beach vacations to cars and kitchen tables.
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There are too few products. They ran into problems when their families took pandemic savings and tried to buy pickup trucks and computer screens. Factory closures associated with pandemics, global transport backlogs, and reduced production are snowballing into a shortage of parts and products. Demand exceeded the supply of goods, allowing businesses to charge more without losing their customers.
Well, in China Latest blockade It is exacerbating the growl of the supply chain. At the same time, the war in Ukraine has reduced the world’s food and fuel supply, boosted overall inflation and affected the cost of other products and services.Gas price is Average about $ 5 1 gallon nationwide, up from just over $ 3 a year ago.
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Service sector pressure. Recently, People have shifted their spending from things to experiences as they have adapted to life with the coronavirus — and inflation Bubbling In the service industry. As Americans compete for the supply of limited apartments, rents rise rapidly, restaurant bills rise as food and labor costs rise, people are enthusiastic about traveling, fuel and labor. Tickets and hotel rooms are more expensive because the power is more expensive.
You may be wondering: what role does corporate greed play in all of this? Indeed, companies are making extraordinarily large profits because they are raising prices more than necessary to cover the rising costs. However, demand can be very strong and consumers are spending directly through price increases, so they can do that. It is unclear how long that pricing power will last. Some companies like Target have already shown that they are starting to lower prices for some products in order to clear inventory and continue to acquire customers.
Understand inflation and its impact on you
How is inflation measured?
Economists and policy makers are closely watching two major inflation indicators in the United States, the consumer price index and the consumer spending index, released Friday.
The CPI keeps track of how much consumers pay for what they buy, and it comes out early to give a clear glimpse of last month’s inflation rate for the first time in the country. The data from the index is also used to calculate the PCE numbers.
The next PCE index released on June 30th will keep track of how much Actual cost.. For example, even if the government or insurance supports the payment of medical expenses, it counts medical expenses. It tends to be less volatile, which is an indicator to look at when the Federal Reserve seeks to achieve an average of 2 percent inflation over time. As of April, the PCE index was up 6.3% year-on-year, more than triple the central bank’s target.
The Federal Reserve is paying close attention to monthly changes in inflation to understand its momentum.
Policy makers are also paying particular attention to the so-called core inflation index, which removes food and fuel prices. Food and gas make up the majority of households, but prices are skyrocketing as global supply changes. As a result, they don’t explicitly read about the inflationary pressures that underlie the economy — what the Fed believes it can do.
“I will review a consistent string of monthly print slowdowns on core inflation before I’m convinced that we’re reaching an inflation trajectory that will return to 2%. In an interview with CNBC last week, the Fed Rael Brainard, Vice-Chair of the Reserve Board and one of its major public messengers, said.
What can delay the rapid price increase?
Everyone guesses how long prices will continue to rise rapidly. Inflation has repeatedly confused experts since the pandemic broke out in 2020. However, based on the factors behind today’s highs, some results are expected.
For one thing, it seems unlikely that rapid inflation will disappear altogether on its own. Wages are rising much faster than usual. That is, unless the company suddenly increases efficiency, it will continue to raise prices to cover labor costs.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So tomorrow the dollar won’t fall as much as it does today. This is usually expressed as an annual change in the prices of daily necessities and services such as food, furniture, apparel, transportation and toys.
As a result, the Fed is raising interest rates to slow demand and curb wage and price increases. Central bank policy responses mean that the economy is almost certainly heading for a slowdown. Already, higher borrowing costs are beginning to cool the housing market.
The question, and the big uncertainty, is how much Fed action is needed to curb inflation.If America is lucky Supply chain shortage Simply put, the Fed may be able to calm the economy moderately and slow down the job market enough to curb wage growth without causing a recession.
In that optimistic scenario, often referred to as soft landing, the balance between supply and demand and re-competition for customers forces companies to lower prices and save significant profits.
However, the Fed faces more difficult challenges as supply problems may continue. In other words, it is to raise interest rates significantly, slow down demand, and enable inflation to be curbed.
Matthew Luzetti, Chief US Economist at Deutsche Bank, said: This is partly due to the fact that consumer spending has shown few signs of cracking so far.
According to Luzzetti’s team, households still have about $ 2.3 trillion in surplus savings to help them survive higher interest rates and prices.
“Demand continues to stagnate,” Anthony G. Capuano, CEO of hotel company Marriott International, said at an event on June 7. “Unlike previous business cycles and recessions, this is an additional aspect where people have been detained for 12 to 24 months.”