Why US inflation is going up and when will it come down
- Inflation in the US eased slightly to 8.3% in August year-on-year
- The Federal Reserve never expected such severe and long-term inflation
- Federal Reserve is expected to hike key interest rate by 0.75%
Inflation in the US eased slightly to 8.3% in August year-on-year from 8.5% in the previous month, with rising costs for food, fuel, medical care, and other essentials squeezing American consumers and wiping out pay raises for many. Prices have risen due to bottlenecked supply chains, strong consumer demand, and global food and energy market disruptions exacerbated by Russia's war in Ukraine.
Though the central bank is trying to tame inflation, it will almost certainly remain considerably above the Federal Reserve's 2% annual target long into next year, if not 2024.
The Federal Reserve never expected such severe and long-term inflation. The Fed's policymakers forecasted in December 2020 that consumer inflation would remain below its 2% annual target and conclude 2021 at roughly 1.8%.
High inflation, which had been relegated to the background for decades, resurfaced with a vengeance last year. The government's consumer price index (CPI) inflation rate was only 1.7% in February 2021 than it was a year earlier.
The year-over-year rise then picked up at 2.6% in March, 4.2% in April, 5% in May, and 5.4% in June. By October, the rate had risen to 6.2%, 6.8% in November, and 7% in December. Then in 2022 inflation rate was 8.6% in May, 9.1% in June, 8.5% in July, and 8.3% in August.
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Why has inflation spiked so aggressively?
When the pandemic crippled the economy in the spring of 2020, lockdowns were implemented, businesses closed or reduced hours, and customers stayed at home as a health precaution, employers cut a staggering 22 million jobs. In the April-June quarter of 2020, economic output fell at a record-breaking 31% annual rate.
The introduction of vaccines had encouraged people to return to restaurants, bars, shops, airports, and entertainment places by the spring of last year.
Costs increased as demand increased and supplies decreased. They couldn't fill job opportunities quickly enough, and they couldn't acquire enough materials to keep up with customer demand. As business picked up, ports and freight yards couldn't keep up with the demand. Global supply chains were clogged.
People criticized President Joe Biden's $1.9 trillion coronavirus relief programme, which included $1,400 checks for most households, in part for scorching an economy that was already overheated.
Many others claimed that the Fed kept rates around zero for far too long, allowing reckless spending and inflated stock, house, and other asset prices to flourish.
When will it get back to normal?
Consumer price inflation may continue to rise as long as businesses struggle to meet consumer demand for products and services. Because the employment market is improving, companies added a record 6.7 million jobs last year and 560,000 jobs each month so far this year meaning that Americans may continue to indulge in everything from lawn furniture to electronics.
This year, many economists expect inflation to remain considerably above the Fed's 2% annual target.
However, relief from rising prices may be on the way. At least in some industries, clogged supply chains are beginning to show indications of improvement.
The Fed's shift away from easy money policies and toward anti-inflationary policies may diminish consumer demand in the long run. There will be no COVID relief cheques from Washington this year, as there were last year.
Inflation is weakening purchasing power and may cause some people to cut back on their spending.
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New COVID variations, on the other hand, might cast a pall over the situation, either by triggering outbreaks that compel industries and ports to close, further disrupting supply chains, or by keeping people at home, limiting demand for commodities.