I’ve decided to stay awhile and make the cost of gas and milk…fun again.
Despite what U.S. officials are saying, it is no longer a question of if inflation is coming—inflation is already here.
Economic trends are telling us that we are heading in a particularly alarming direction. Recently, inflation rose by 5.4% for basic consumer goods. This sent the stock market into a brief panic, even on a day when numerous companies were broadcasting blockbuster earnings.
So, let us take a closer look at where we are currently concerning inflation and where we are trending in the months ahead.
Less bang for your buck
No, you are not wrong if you feel like your paycheck just isn’t stretching as far. This is the handiwork of inflation—and it’s here in full force.
Inflation put simply, is when the price of a good or service increases. If a haircut cost you $20.00 in 1995, and that exact same haircut costs you $35.00 today, that is a product of inflation.
While it is true that things change prices all the time, inflation is when prices increase affects many goods and services simultaneously.
And, keep in mind, not all inflation is bad! If held at a reasonably low rate, inflation can actually be good for the economy in that it can stimulate consumer demand and consumption, which further drives the growth of the economy.
It can also make investing more attractive to current and would-be investors as well. Stabilized and healthy inflation brings with it lower interest rates. With low-interest rates, investors are much more likely to invest.
Who’s keeping score, anyways?
In the United States, inflation is primarily monitored by the Federal Reserve System (FRS) (or the FED for short).
The Fed aims for an inflation rate of 2%, as they believe that this is the most ideal rate of inflation for maximum employment and price stability.
We are currently at an inflation rate of 5 percent. That is certainly a far cry from 2%, and it is that much more significant when compared with the inflation rates over the past five years:
- 2016 – 2.1%
- 2017 – 2.1%
- 2018 – 1.9%
- 2019 – 2.3%
- 2020 – 1.4%
The emperor’s new clothes are getting expensive
However, the FED is of the firm belief that this trajectory is not to be discouraging and that this is a one-time occurrence due to a culmination of factors throughout both the world and the economy, many of which are due to COVID-19.
The Biden administration also tends to agree with this line of thought. In fact, President Biden’s $1.9 trillion relief plan is a compelling testament to that belief.
However, this relief plan has the potential to have significant consequences for the economy as well. Overstimulation of the economy can bolster and aggravate inflation rates.
For example, let’s take a look at some goods that are already at an all-time high in the economy and what impact that will have on our economy.
The current price of copper is higher than it has ever been. Specifically in the United States, copper is used for construction, power generation and transmission, electronic product manufacturing, among many other purposes.
An increase in the price of copper will most likely result in an increase in all of the goods and services associated with these industries and sectors as well.
This year saw the price of used cars reach an all-time high as well. Many believe this is largely due to a global chip shortage.
And these aren’t the only materials and parts that are becoming more and more scarce. Tires and resins are starting to be in short supply as well.
Right now, it is certainly a seller’s market. While that is great for those looking to sell, the other side of the coin is that this is the worst time to consider buying a used vehicle.
The initial response by buyers was to opt to purchase new cars. However, they quickly rose in price as well.
The price of lumber also reached its highest price point in the country’s history in 2021 as well. This increase is having an especially heavy impact on home building and development.
Lumber production, like many other industries, was all but halted in response to COVID-19.
However, this halt was in anticipation of a housing market crash that never actually came. Instead, the result was an unexpected sustained demand without nearly enough supply. This raised the price of lumber to astronomical proportions.
Wagering with double-sided coins
While the $1.9 trillion coronavirus relief will undoubtedly be a much-needed boost for the country, the possibility of hiking up inflation even higher (whether knowingly or intentionally or not) is an increasingly real possibility.
Opponents argue that the amount is simply too much and will have widespread complications and consequences that could last years (and even generations!) if we are not careful.
So, what happens if this is the case—that the country will be crippled by the highest inflation it has seen in recent history? Well, without government intervention, it will just keep getting worse.
For the average American, inflation is not something you can just wait out. You need to spend money on your home, your vehicle, your food, entertainment, etc. It is not something that we can deny or look the other way on.
Instead, the tendency will be to spend now, before the value of our savings gets even worse. While this tendency is entirely valid and legitimate, it also guarantees that inflation will be self-perpetuating. As people up their spending, the economy will push up its prices. Such is life, and so it goes.
Well, not if the Fed has anything to say about it. How exactly do we break the cycle? How do we lift the curse? How do we cure the bloating?
Well, the Feds and the government will have to step in and prescribe a plan to reverse and stabilize the economy.
And, we as a country are not going to like the taste of that medicine.
One way in which the Federal Reserve will curb inflation rates is to increase interest rates on lending. This will result in fewer people borrowing, as it becomes either less lucrative or too much risk involved.
With fewer people borrowing, there will subsequently be fewer people spending overall. And, with fewer people spending, the prices will naturally come down.
However, this is not the only means to combat inflation. Governments can also step in and adjust wages and price controls. This is an extreme measure that can result in both economic recession and job loss.
Hanging in the balance
So then, what’s next? Well, it certainly goes without question that the country needed some form of stimulus after the ravages of COVID-19.
In that sense, this relief bill was absolutely necessary. Therefore, the question is not if the bill was the right choice or not.
Instead, the questions that we do not have the answers to quite yet are more along the lines of—was the $1.9 trillion too much? Should it have been introduced in doses? Was it focused on the right areas?
We are already seeing record highs in a variety of different goods and services in our economy. And while it is true that these are indeed unprecedented times and that we do not have obvious answers. What we do have is a very recent history in dealing with these same circumstances, albeit for very different reasons.
We should look back at what history has taught us and ensure that we do not contribute to or amplify the already crippling impact that COVID-19 has had on our economy and our country.
And, most importantly, we need to do everything within our power to ensure it does not negatively impact generations to come. The decisions we make now will be deciding not only our future but that of our children as well.