What drives inflation? The prices of goods and services have just reached a 13-year high.
U.S. prices for goods and services, which include everything from washing machines to auto repairs, rose in June at the fastest rate in 13 years as the economic recovery from the pandemic progressed, according to the last read of the consumer price index of the Ministry of Labor. Excluding the food and energy sectors, where prices tend to fluctuate often, prices have increased the most in 30 years. What is happening? Why does everything seem so expensive?
News @ North East speak with Paul Chiou, associate professor of finance, to find out.
The shock of the stickers is real. Even the hot dogs are up to par. What is happening here?
The increase in prices is determined by the invisible hands of an economy: supply and demand. Price increases vary from sector to sector and from good to good. Hot dogs can be one of the examples. What matters to decision-makers is the overall price level, such as the consumer price index (CPI).
There are several factors we may want to pay attention to: the slower restart of domestic production lines in the United States and the restructuring of the global supply chain, which is causing shipping costs to rise recently. Domestic production lines are still below pre-pandemic level due to the shortage of imported materials and rising labor costs.
There is also a higher demand for certain commodities such as cars, real estate and food, which contribute to inflation.
How much did stimulus funds earlier this year contribute to a 13-year high in the Consumer Price Index?
Since the start of the pandemic, total Fed spending has stood at around $ 3 trillion since April 2020. This includes loans and stimulus checks to individuals. Consider that the total GDP [Gross Domestic Product] in the United States is about $ 21 trillion in 2020, representing a loss of about 5% due to the pandemic, fiscal policies actually injected 10% net of GDP into the US economy.
Federal funding helps keep businesses and people liquid and keeps them out of the water, but the federal government has invested more money than the loss of GDP caused by the pandemic. Thus, the impact of stimulus programs on inflation cannot be ignored.
Who benefits and who suffers from inflation?
The big winners from high inflation are borrowers and asset owners. They include the US Treasury, the world’s largest borrower, equity and real estate investors, and mortgage owners. On the other hand, higher inflation hurts savers, retirees and fixed-wage workers. Firms with strong pricing power can benefit from this, as the prices of their products and services can adjust quickly without worrying about decreasing demand. Conversely, companies whose customers are particularly price sensitive, such as restaurants and food manufacturers, suffer more and generally respond to inflation by cutting back on their products, such as making smaller burgers without going down. the prices.
When do you think the prices will return to Earth?
If you ask me the exact time, the question is above my pay level. But overall, the answer depends on the strengths. The prices of some products, such as used cars, may fall when the microchip shortage and / or the shock of Hertz’s bankruptcy relaxes. But due to the rising cost of materials and labor, real estate and food are unlikely to drop.
And remember that prices in certain sectors, such as healthcare, have never has steadily increased at any time over the past two decades. We will likely live in a world of high inflation.
If the central bank doesn’t gradually take its foot off the accelerator now and keep interest rates low, do you think it will have to brake later with higher rates?
Like most developed countries, US central bankers always pay close attention to the Federal Reserve’s balance sheet to ensure the stability of the financial system. The last time the Fed hiked rates to control inflation was in the early 1980s, when Paul Volcker was president. The Fed aggressively raised interest rates by about 9 percentage points in about two years, leading to a recession with a national unemployment rate of 10%.
Right now, with the financial and real estate markets much larger and sensitive to interest rate hikes, it is doubtful that the Fed will raise rates again quickly and significantly. The economic situation is very different today from what it was 40 years ago. Inflation was much higher then due to the energy crisis and the federal government borrowed less – 35% of GDP in 1980 compared to 130% in 2021.
As we have learned from past quantitative easing in response to the Great Recession of 2008, the Fed will gradually begin to tighten monetary policy and reduce its balance sheet. But if we read between the lines of Powell’s testimony in July, the Fed may not act until the labor market strengthens further.
What are some of the economic outcomes in the United States if the virus rages on?
The global economy will of course be negatively affected again, but would not be to the same degree as it was when the pandemic broke out in 2020. Most investors realize that we may have to live with it. COVID-19 virus forever, and the knowledge and resources, like vaccines, telecommuting skills, etc., have grown to respond.
Given the high vaccination rate in the United States, the impact of the next pandemic wave on national economic activities will be diminished. But for industries related to international travel, like airlines and cruise ships, the impact can be significant.
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