The world is breathing a sigh of relief as things normalize after Covid-19 pandemic devastation. Governments are lifting lockdowns, restrictions are being relaxed, and the economy is slowly returning to a semblance of normality. As a result, consumer spending is on the rise.
Inflation Is On The Rise
In April, CNBC reported that the Consumer Price Inflation in the U.S. increased 4.2% from the previous year. Additionally, in June, the consumer price index increased 5.4% from last year, the sharpest jump since the 2008 Global Financial Crisis. Excluding energy and food, the core CPI increased by 4.5, the biggest jump since 1991.
Now, the big question is, what is causing the high inflation?
Increasing Money Supply
The Federal Reserve has resorted to flooding the economy with dollars to curb inflation. According to Forbes, the M2 money supply in April 2021 was $20.11 trillion, representing a 30% increase since January 2020. Too many dollars in the system reduces the currency value.
In addition, there is pent-up demand — more money going after fewer products — that exacerbates the inflation problem. Remember, when the COVID-19 pandemic hit, some manufacturing plants were closed while others downsized their operation. As a result, the market has exhausted its stockpiles. Similarly, the demand for air tickets is up again.
Manufacturers are working against time to match the demand. For instance, the pandemic affected car production. As a result, the cost of used cars and trucks is higher than ever before. The point is, a limited supply of goods, coupled with the expansion of dollars in the economy leads to inflation.
What Is The Inflation Debate In The U.S.?
The real rate of inflation is a growing concern especially among economic policymakers. While the whole discussion could be confusing to the masses, it is of critical importance. The next course of action could result in an economic slowdown, an increase in mortgage rates, and high volatility of stock prices. For these reasons, incoming economic data will be critical for financial analysts, policymakers, and economists.
According to AP News, Federal Reserve chairman Jerome Powell argues that the inflation spike is transitory, caused by the reopening economy after the pandemic. While the Federal Reserve maintains the inflation rate will average above 2% and move down after that, many economic experts hold a different view.
According to Bank of America strategist, Michael Harnett inflation could rise by up to 4% and persist longer than the Fed reported. David Roche, president of the investment firm Independent Strategy, holds a similar view. He said inflation could hit 3-4% in mid-2022. This could cause a crisis in the financial market and the U.S. economy at large.
According to the thinkers, Fed measurement tools aren’t in line with consumer spending. In other words, the inflation experienced by consumers is understated. Once the consumers start feeling the effects, they are likely to push for…
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