In the supermarket you get about 11 cents less than a year ago. That dollar covers 15 cents less on energy bills
and it’s worth six cents less on your rent and housing costs. That adds up to a pretty decent chunk of change.
It also explains why, with prices rising across the board, inflation is now a major concern for Americans.
Inflation is almost as high as it was in the early 1980s. According to the latest July report from the Bureau of Labor Statistics, it was 8.5%, but it would have been even higher if gas prices hadn’t fallen.
So when will the price hikes end? The answer is probably never. But that’s okay, as long as the raises aren’t too high.
It’s not just the US that faces that problem. In almost every advanced economy in the world, average annual inflation in the first quarter of this year was at least twice as high as last year.
All over the world, people face tough decisions about how to stretch their paychecks. Wages fell by 3.5% last year, after adjusting for rising prices.
Why some inflation is good?
Inflation won’t stop, it’s just getting worse. In fact, we don’t want it to stop altogether.
The Federal Reserve, the US central bank that has to lower inflation through a series of rate hikes, is aiming for a target of about 2%. That means prices will still rise, just not nearly as much.
When people say inflation is declining, they don’t mean groceries are getting cheaper. They mean they don’t go up that much every month. It is very rare to enter a deflationary period, and the government likes to avoid it if possible because it usually indicates that the economy is cooling down far too quickly.
So yes, inflation will last for a very long time, but you won’t notice it much. Between the beginning of 1991 and the end of 2019, annual inflation averaged about 2.3% per month. Those are ideal raises, the kind that can keep up with the cost of living, the “in my day, a soda cost only a nickel” raises that take a long time to become apparent.
Of course, that doesn’t mean that some prices won’t fall. For example, the price of gas has fallen sharply in the past two months. Food prices may also fall. Food and gas prices are more volatile than other expenditures, as they are influenced by external factors such as supply chain problems and the Russian war on Ukraine. The Federal Reserve can’t do much to keep them in check, and they tend to swing both ways.
But for the most part, prices of goods will remain higher, and consumers will feel no relief until their wages catch up with the new prices. In the past four decades, there has been no deflation in core commodities, which exclude food and energy, said Nick Roussanov, a professor at Wharton Finance. Durable goods and services, such as cars, appliances, and education, are rarely discounted.
The Fed is now trying to shorten the time it takes for wages to catch up with these new prices. The longer it takes for that to happen, the more likely Americans are to dive into their savings or go into credit card debt. It’s already happening: In the past year, credit card debt has increased by $100 billion, or 13%, the largest percentage increase in more than 20 years.
The reason for optimism
Inflation will not continue at the current pace forever. Most economists predict that it will reach that target of 2% by 2024.
So yes, things will continue to hurt, but they won’t be anything like the… bring-a-wheelbarrow-money-to-buy-a-bread inflation crises we learned about in history lesson. No one is worried about hyperinflation, at least not in the United States.
That’s not to say high inflation won’t last.
Some economists believe that inflation could remain at a slightly elevated level of 3% to 4% for decades. Boomers are retiring and the birth rate is falling. That is depressing the workforce, says former British central banker Charles Goodhart, and we are entering an era of staff shortages, which means higher prices. Central bankers are paying attention to the theory. President Mary Daly of the Federal Reserve Bank of San Francisco has said immigration restrictions may need to be re-examined to resolve the issue.
There have been long periods of high inflation in the US before: in the 1970s, the US economy suffered three recessions, in which the underlying inflation problem never went away. But since then, monetary policy has changed. In that same decade, central banks had multiple goals: high output and employment and price stability. Today, the Fed prefers price stability over those other mandates. That means Fed Chair Jerome Powell has a mandate to raise interest rates until inflation falls, even if the economy is better than expected.
A global crisis
The US is probably safe from hyperinflation: Prices have increased, but not unprecedented, and dropped last month.
Yet other countries suffer. Inflation in Argentina is at a 20-year high of over 70%, and the country’s central bank has raised its key interest rate to 69.5% in a bid to contain rising prices. Turkey’s annual inflation rate reached nearly 80% in June, the highest level in about two decades.
Prolonged high prices tend to plunge some countries into periods of instability, which in turn drives up food and gas prices worldwide. They also
developing countries more heavily and, according to a UN report, could negate progress made in the fight against climate change over the past decade.