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  • Writer's pictureMatthew Inui

Department of Labor Reports Highest Inflationary Increase in 40 Years

Increases in the inflation rate cause the purchasing power of a single dollar to decrease faster than wages rise to compensate. (Lucas Favre/Unsplash)

In their May report, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI), a measure of the relative amount consumers pay for products, rose 8.6 percent in May, the highest rate of increase in nearly 40 years.

For the average American, this sharp increase is experienced as a significantly higher cost of living. In May, food prices rose 1.2 percent, vehicle prices rose 1.8 percent, energy prices rose 3.9 percent, and mortgage rates rose 5 percent. While the Labor Department reported some job and wage growth, the much faster-growing rate of inflation has prevented workers from getting much mileage out of their increased paychecks. Unfortunately, Treasury Secretary Janet Yellen added that these “unacceptably high” prices are likely to stay for the rest of 2022 if not longer.

Why Is Inflation Rising?

Economists believe that one of the main drivers of inflation right now is the pandemic. Most families have been stuck at home for almost two years, amassing large amounts of money. COVID stimulus payments only increased Americans’ discretionary savings. After stay-at-home orders were lifted and life began returning back to normal, people began spending more of their savings, increasing demand. However, supply has been unable to keep up with the increase in demand, so suppliers have raised their prices, accounting for the higher CPI.

As for this lack of supply, many economists point to pandemic-induced factory closures as well as supply chain disruptions, such as the shortage of truck drivers, as the primary causes. According to Yellen, the main causes of stubborn inflation are “global, not local.” Most obvious is the war in Ukraine, which has disrupted global supplies of fossil fuels and wheat products. Economic tariffs on Russia as well as Russia’s withdrawal from global economic alliances such as the SWIFT payment system have further crippled the world economy. Meanwhile, factory closures and workforce shortages in China as a result of an increased number of COVID cases have contributed to reduced supplies of manufactured goods.

How Has the Fed Responded?

When inflation initially began growing at an alarming rate, the government largely remained indifferent. Despite clear signs in the fall of 2021 that inflation would continue rising, the Federal Reserve Bank (the Fed for short) continued to remove policy support, only raising interest rates in March of 2022. Many, including Cleveland Federal Reserve Bank President Loretta Mester, feel that much of the inflation now could have been avoided if the Fed had acted earlier. “The recession risks are going up partly because monetary policy could have pivoted a little bit earlier than it did,” Mester told CBS. Even those working in the Fed acknowledge that they should have acted sooner. Randal K. Quarles, who was the Federal Reserve vice chair for supervision in 2021, said “it was a complicated situation with little precedent,” adding, “people make mistakes.”

The Fed has since raised its benchmark interest rate by three-fourths of a percent, signaling that they plan to raise it another 1.5–1.75 percentage points by the end of the year. Already, this move has seen a positive effect, with slower wage and price growth as well as a cooled-off housing market. However, the Fed is being careful not to hamper economic activity too much. “We are not trying to provoke, and I don’t think we will need to provoke, a recession,” Federal Reserve Chair Jerome Powell said before the Senate Banking Committee, although he did acknowledge that it was “certainly a possibility.”

Stabilization or New Normal?

Many economists are hopeful that even though inflation might continue growing in the coming months, the world economy will eventually stabilize. Once supply chain issues are worked out, “these prices will actually drop,” according to Dean Baker, senior economist at the Center for Economic and Policy Research. However, some economists think that these higher prices are going to become a new normal. Minneapolis Fed President Neel Kashkari said that it’s possible that “the massive fiscal and monetary intervention in response to COVID-19 has moved the economy to a higher-pressure, higher-inflation equilibrium, with people earning more and spending more than before.” However, even Kashkari conceded that “there’s some evidence that things are starting to soften by a hair. But we just need to keep paying attention to the data and see where it comes out before we can draw any conclusions.”



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