US prices for goods and services, which include everything from washing machines to car repairs, rose as fast as they had in 13 years in June as the economic rebound from the pandemic, according to the latest reading the Ministry of Labor’s consumer price index. Excluding the food and energy sectors, where prices fluctuate frequently, prices have risen the most in 30 years. What’s happening? Why does everything seem so expensive?
News @ Northeastern spoke with Paul Chiou, Associate Professor of Finance to find out.
Sticker shock is real. Even hot dogs are way up there. What’s going on here?
The rise in prices is determined by the invisible hands of an economy – supply and demand. The price increase varies from sector to sector and from good to good. Hot dogs can be one of the examples. What interests politics is that a total of Price level, such as the consumer price index (CPI).
There are several factors to watch out for – the slower restart of domestic production lines in the US and the restructuring of the global supply chain, which has recently resulted in an increase in shipping costs. Domestic production lines are still below pre-pandemic levels due to the lack of imported materials and rising labor costs.
There is also greater demand for certain products such as cars, real estate, and groceries that contribute to inflation.
To what extent did economic funds contribute to a 13-year high in the consumer price index earlier this year?
Since the beginning of the pandemic, total Fed spending has been around $ 3 trillion since April 2020. This includes loans and economic checks for individuals. Remember that total GDP [Gross Domestic Product] In the United States is about $ 21 trillion in 2020, a 5 percent loss due to the pandemic, fiscal policy has actually added 10 percent of net GDP to the U.S. economy.
Federal funding helps maintain and keep business and people liquidity afloat, but the federal government has invested more money than the GDP loss caused by the pandemic. The effects of the economic stimulus programs on inflation should therefore not be neglected.
Who will benefit and who will inflation hurt?
The biggest winners from high inflation are borrowers and wealth owners. These include the US Treasury Department – the world’s number one borrower – investors in stocks and real estate, and homeowners with mortgages. On the other hand, higher inflation harms savers, retirees and workers with fixed wages. Companies with strong pricing power can benefit as the prices of their products and services can adjust quickly without worrying about a drop in demand. Conversely, companies whose customers are particularly price sensitive, such as restaurants and food manufacturers, suffer more and usually respond to inflation by shrinking their products, e.g. B. Make smaller hamburgers without lowering prices.
When do you think prices will return to earth?
If you’re asking me the exact time, the question is about my pay grade. But overall the answer depends on wealth. The prices of some products, such as used cars, may fall as the microchip shortage and / or the shock of the Hertz bankruptcy wear off. However, due to increased material and labor costs, real estate and groceries are unlikely to decline.
And remember that prices are in certain sectors like healthcare never stopped rising in the last two decades. We are likely to live in a world of high inflation.
If the central bank doesn’t gradually take off the gas – and keep interest rates low – will it have to step on the brakes later with higher interest rates?
As in most developed countries, central bankers in the United States always pay close attention to the Federal Reserve’s balance sheet to ensure the stability of the financial system. The last time the Fed raised rates to control inflation was in the early 1980s when Paul Volcker was chairman. The Fed aggressively hiked interest rates about 9 percentage points in about two years, creating a recession with a national unemployment rate of 10 percent.
With the financial and housing markets currently much larger and more susceptible to rate hikes, it is questionable for the Fed to hike rates again quickly and significantly. The economic picture is very different today than it was 40 years ago. Inflation was much higher at the time due to the energy crisis and the federal government borrowed less – 35 percent of GDP in 1980 compared to 130 percent in 2021.
As we have learned from previous quantitative easing in response to the Great Recession of 2008, the Fed will gradually begin to tighten its monetary policy and shrink its balance sheet. But if we read between the lines of Powell’s July statement, the Fed may not act until the labor market continues to strengthen.
What are some of the economic consequences for the United States if the virus rages again?
The global economy will of course be negatively affected again, but not to the same extent as when the pandemic broke out in 2020. Most investors are aware that we may have to live with the COVID-19 virus forever and have developed the knowledge and skills the resources, like vaccines, teleworking skills, etc., to respond.
Given the high vaccination rate in the US, the impact of the next wave of pandemics on the domestic economy will be mitigated. However, for industries related to international travel such as airlines and cruise lines, the impact can be significant.
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