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Here’s a guide to understand what’s going on inflation And how to think about value gains when navigating this complex moment We and world economy.
what is inflation
It may be helpful to think of the causes of today’s inflation as falling into three related buckets.
Strong demand. Consumers are spending big. At the start of the pandemic, households saved as they were stuck at home, and government aid that continued into 2021 helped them pull out even more money. Now, people are taking jobs and winning salary increase. All those factors have padded household bank accounts, allowing families to spend on everything from backyard grills and beach vacations to cars and kitchen tables.
– Very few goods. As families take out pandemic savings and try to buy pickup trucks and computer screens, they run into a problem: Very little stuff is moved around. Factory shutdowns linked to the pandemic, global shipping backlogs and reduced production have snowballed into parts and products shortages. Since demand outweighs the supply of goods, companies are able to charge more without losing customers.
Now, China’s latest lockdowns are adding to supply chain snoring. At the same time, the war in Ukraine is cutting off the world’s food and fuel supplies, driving up overall inflation and feeding into the cost of other products and services. Gas prices nationally average $5 per gallon, up from just $3 a year ago.
– The pressure of the service sector. Lately, people have been shifting their spending away from things and back toward experiences as they adjust to life with the coronavirus – and inflation in the service industries has been bubbling. Rents are climbing sharply as Americans compete for a limited supply of apartments, restaurant bills are rising higher as food and labor costs rise, and airline tickets and hotel rooms are more expensive as people travel. are curious and because fuel and labor are more expensive.
You may be wondering: what is the role of corporate greed in all of this? It is true that companies are making unusually large profits because they inflate prices excessively to cover rising costs. But they’re able to do so partly because demand is so strong — consumers are spending right through price increases.
How is inflation measured?
Economists and policy makers are watching closely AmericaTwo primary inflation gauges: the consumer price index, which was released on Friday, and the main personal consumption expenditure price index.
CPI It shows how much consumers pay for the things they buy, and it comes first, making it the nation’s first clear glimpse of what inflation did months ago. The data from the index is also used to come up with PCE figures.
The PCE Index, which will be released on June 30, tracks how much things actually cost. For example, it counts the cost of health care procedures even when the government and insurance support pay for them. It is less volatile, and it is the index federal Reserve It looks at when it tries to achieve an average inflation of 2% over time. As of April, the PCE index was climbing 6.3% over the previous year – more than three times the central bank’s target.
irrigated Officials are watching month-to-month changes in inflation to get an idea of its pace.
Policymakers are also particularly attuned to the so-called core inflation measure, which separates food and fuel prices. Although groceries and gas make up a large portion of the household budget, they also tend to jump in prices in response to changes in global supply. As a result, they don’t give a clear read on the underlying inflationary pressures in the economy — something the Fed believes it can do.
Can bullish price gains be slow?
No one knows how long prices will continue to climb sharply: Inflation has repeatedly baffled experts since the pandemic took hold in 2020. But based on the drivers behind today’s hot prices, some results appear likely.
For one, accelerated inflation is unlikely to go away entirely on its own. Wages are climbing faster than usual. This means that unless companies suddenly become more efficient, they will probably try to keep raising prices to cover their labor costs.
As a result, the Fed is raising interest rates to slow demand and reduce wage and price increases. The central bank’s policy response means the economy is almost certainly headed for a recession. Already, higher borrowing costs have begun to cool the housing market.
The question — and the great uncertainty — is how much Fed action will be needed to get inflation under control. If the U.S. gets lucky and the supply chain constraints ease, the Fed may be able to slow the economy down slowly, slowing enough to reduce wage growth without causing the job market to slump.
In that optimistic scenario, often referred to as a soft landing, companies will be forced to lower their prices and reduce their larger profits as supply and demand balance and they compete for customers again.
But it’s also possible that supply issues remain, leaving the Fed with a more difficult task: raising rates further to slow demand enough to bring price rises under control.
“The road to a soft landing is very narrow — narrow to the point where we expect a recession,” said Matthew Luzzetti, chief US economist. Deutsche Bank, This is partly because consumer spending has so far shown little sign of breaking down.
Luzzetti’s team estimates that families still have about $2.3 trillion in additional savings to help them weather higher rates and prices.
“There remains huge demand,” said Anthony Capuano, the hotel company’s CEO. Marriott Internationalsaid during a program on Tuesday. “Unlike in previous economic cycles and economic downturns, here you have this extra dimension, that people were put off for 12 to 24 months.”
(This article was originally published in The. new York Times,
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