SPRINGFIELD, Mo. — Citizens in America are noticing that simple groceries such as milk and eggs are more expensive than they were last year. The rising prices have lifted inflation to its highest level in 40 years.
The United States isn’t the only country dealing with inflation either. The United Kingdom’s consumer price inflation has surged to the highest level in three decades, bringing on the pressure in households already facing a huge increase in energy costs.
Global supply chain backlogs and booming demand from shoppers have pushed up prices on consumer goods. It wasn’t supposed to be this way. Barely more than a year ago, the Federal Reserve had forecast that consumer prices would end 2021 only about 1.8% higher than they were a year earlier, below even its annual 2% inflation target. But high inflation reasserted itself last year with astonishing speed.
In February 2021, the Labor Department’s consumer price Index was running just 1.7% ahead of a year earlier. From there, the year-over-year price increases accelerated steadily. Now, many economists expect consumer inflation to remain elevated.
“[Inflation] could be around for a while,” said David Mitchell, an economics professor at Missouri State University. “The problem is of course once inflation gets grounded into the system it’s really hard to get it out because people have now built it into their expectations that their wages are going to have to go up 5% or 8%.”
What is causing inflation?
As high inflation first became an issue in the Spring of 2021, the Fed laid out a few reasons to explain what was going on, which included base effects, supply-chain issues, and a tricky labor market.
Base effects are perhaps the most intuitive reason for high price growth. That is, prices dropped considerably throughout 2020 as state governments imposed lockdowns in an attempt to slow the spread of COVID-19.
Once the pandemic began the demand for travel plummeted which led to a drop in prices. Now, with more people vaccinated more people are wanting to travel again. Now, airline prices are much higher than a year ago but they remain cheaper than where they were pre-pandemic.
According to reports, supply chain issues is another factor that is causing inflation, but Mitchell says supply chain issues have been happening since the beginning of 2020.
“We have been having supply chain issues since January, February, and March of 2020,” said Mitchell. “So, it’s not just a supply chain issue. It’s more than that. You had an unprecedented amount of government spending within the last two years. You had them sending people lots of checks, so that has a big part of it as well.”
Labor issues are another concern. Millions of Americans lost their jobs during the COVID-19 Recession, which resulted in fewer items being produced. Meanwhile, businesses have had a difficult time last year hiring enough workers.
What kind of impact will this have on small businesses?
Owners of small businesses have had a rough couple of years since the pandemic began. At the beginning of 2020, many businesses were forced to shut down and left many owners wondering about the future. Now, business owners will have to worry about the major increase in inflation.
“This is going to have a huge impact on small businesses because they are the least likely to be able to deal with the recent price increase,” said Mitchell. “You’re really large companies like General Motors, Ford, Toyota, they can absorb a lot of cost increases. But the small businesses have a much harder time doing that.”
According to Mitchell wages are the largest component of cost for all firms. Small businesses have several problems owners have to find a solution to.
“They’re thinking, I have to pay my workers more, I can’t get people to come in, the stuff I need to make my product is difficult to get,” said Mitchell. “It really is the perfect storm for small businesses.”
Is Inflation a good thing?
Some economists believe inflation can be a good thing, but Mitchell is not one of them.
“Typically what a lot of people think if you have this really slow mild inflation you can decide to not increase workers pay, which is essentially giving your workers a pay cut without them even knowing it,” said Mitchell. “The fact that it’s happening to you slowly doesn’t change the fact that it is happening to you.”
Inflation could ease as the omicron wave fades and as Americans shift more of their spending to services such as travel, eating out, and movie-going. That would reduce the demand for goods and help clear supply chains.
But some higher prices, such as rent may prove to be a challenge. Rental costs, which have accelerated since summer, rose 0.4% in December, the third consecutive monthly increase. That’s significant because housing costs make up one-third of the government’s consumer price index.
Republicans in Congress and even some liberal economists say Biden is partly to blame for high inflation, arguing that the financial rescue package he pushed through Congress last March added significant stimulus to an already strengthening economy.