Last month, inflation hit its highest level in over 40 years, with a 7% increase over the previous year.
This is driving up household costs, eroding wage growth, and putting pressure on President Joe Biden and the Federal Reserve to confront what has become the largest threat to the US economy.
Prices for vehicles, petrol, food and furniture increased dramatically in 2021. Government cash injections and ultra-low loan rates boosted demand for commodities, while vaccinations gave individuals the opportunity to eat out and travel.
According to the Labor Department, inflation figures that exclude volatile food and gas costs increased by 5.5 percent in December, the highest level in decades. Inflation increased by 0.5 percent in November, compared to 0.8 percent the previous month.
It hasn’t been this high since the days of Thatcher and Reagan, according to James Knightley, the chief international economist at financial services firm ING.
Most economists believe inflation will not return to pre-pandemic levels very soon.
Inflation isn’t just a concern in the United States. In December, inflation in the 19 European countries that use the euro currency increased by 5% over the previous year, the highest increase on record.
Businesses trying to employ have increased wages, but rising prices for goods and services have undermined many Americans’ gains. Lower-income families have been hit the hardest, according to polls, and inflation has begun to supplant even the coronavirus as a public health concern.
None of this has happened in the United States since the early 1980s. Fed Chair Paul Volcker responded by raising interest rates to excruciatingly high levels — the prime rate for banks’ best customers reached 20% in 1980 — plunging the economy into a prolonged recession.
Inflationary pressures have put President Joe Biden on the defense. Initially, his administration claimed that the price hikes would only be temporary. Now that inflation has continued, Biden and other Democratic members of Congress have begun to criticize big businesses.
They claim that meat producers and other companies are profiting from pandemic-related shortages by raising prices and profits. Even some left-wing economists, however, disagree with this assessment.
A wage-price spiral is one development that experts are concerned about. What happens when workers want more compensation to compensate for increasing costs, and corporations respond by raising costs even higher to meet the higher pay?
According to economists, mismatches between supply and demand are the primary cause of inflation. Because of a lack of semiconductors, automakers have been unable to produce enough new automobiles, leading to the hike of used car prices by 37%.
As the omicron wave fades and Americans move more of their spending to services like travel, dining out, and going to the movies, inflation may reduce. This would lessen demand for items while also assisting in the clearing of supply networks.
Republicans in Congress, as well as some liberal academics, blame Biden for high inflation, claiming that the financial rescue plan he pushed through Congress last March contributed additional stimulation to an already strong economy.
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