Calm down – inflation isn’t here to stay, experts say

Right now, inflation is very high. In fact, in the United States, it’s the highest it’s been in over three decades at 6.2%.

What’s inflation, again?

• In a sort of technical definition, inflation is the loss of purchasing power of a money. And, it’s measured by looking at the change of the prices of certain specific goods over a period of time.

• The thing about inflation, though, is that a bit of it is good because it means that there’s demand and stimulation in the economy. When there’s too much or too little, though, that’s when it can get a bit problematic.

• You see, central banks have several goals they aim to achieve, one of which is making sure that prices are stable. In other words, that inflation is kept in check. Not too high, not too low – around the two percent mark.

• So they use interest rates to try and control price growth.

• For example, suppose inflation is getting a bit out of hand because people are spending too much. In that case, the banks will increase rates, which will incentivize consumers to save their money in banks, make it more expensive to borrow and spend for both consumers and businesses, and so all in all, things in the economy slow down and with that, inflation settles down as well.

• Thing is, right now, inflation is very high. In fact, in the United States, it’s the highest it’s been in over three decades at 6.2%.

So, what’s up with inflation?

• Short answer? It’s high, and it’s pretty much the pandemic’s fault. But let’s dig a little deeper.

• After the US economy shut down, the economy went into a massive dip 22 million jobs were lost. Economic output also dropped over 30% in last year’s April-June quarter.

• But as mandates were lifted and stimulus money poured in, millions of Americans poured back into restaurants, shopping centers and just about anywhere they could spend money.

• None of these businesses were quite ready for this influx of people. And, since they hadn’t been keeping up with inventory during this time and weren’t expecting consumers to be so excited, shortages started to occur.

• In fact, shortages occurred across many goods, but some of these goods were more important than others, such as chips, which are used in pretty much every electronic good and cars.

• But on top of all this, there’s also a worker shortage in the US and other key countries where a lot of our goods are produced, such as Vietnam. This has led to businesses trying to incentivize workers to try to come back in the form of higher wages, which has also pushed up the prices of goods since now the cost to hire people to make stuff has also increased.

So, is it actually a problem?

• So inflation is obviously dominating the headlines and many think that the Federal Reserve need to quickly increase interest rates and withdraw support for the economy to tame inflation.

• But others are saying that it’s not something that will persist forever and so not to rush.

• It may take a while to normalize, and experts think it will last well into next year, but many predict that as soon as the global supply chain stabilizes, so will inflation.

• The Fed and The Goldman Sachs Group, Inc. believe that inflation will still be high until the start of next year, but will continuously decrease and stabilize by the year’s end.

• On Tuesday, the chief executive officer of JP Morgan & Co., Jamie Dimon, explained that the inflation and supply chain issues would eventually stabilize. Still, according to Dimon, some of the factors contributing to the higher prices, such as oil and higher wages, are here to stay.

• “There are other things which are probably not that transitory," Dimon said. “I don’t think oil prices are going down."

What are others saying?

• Across the board, the consensus seems to be the same: “Sure, it’s bad, but it’ll get better.”

• Goldman Sachs, for example, released a report indicating their belief that there will be a brief spike in inflation, but it will soon begin a downward trajectory throughout 2022.

• “This slower resolution of supply constraints means that year-on-year inflation will be higher in the immediate aftermath of tapering than we had previously expected,” said Goldman Sachs chief economist Jan Hatzius.

• “While we expect inflation to be on a sharp downward trajectory at that point and to continue falling through end-2022, this higher-for-longer path increases the risk of an earlier hike in 2022.”

• Jason Furman, who served as the top economic adviser in the Obama administration, believes that some of these issues can be attributed to overspending in the US economy, calling it “kerosene on the fire.”

• “Inflation is a lot higher in the United States than it is in Europe,” said the now economist at the Harvard Kennedy School. “Europe is going through the same supply shocks as the United States is, the same supply chain issues. But they didn’t do nearly as much stimulus.’’

What’s next?

• President Joe Biden has said that inflation is a top priority for his administration and he’s working on trying to tame these high consumer prices.

• “Inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me,” wrote the President in a statement released by the White House.

• Biden also indicated that he was asking the Federal Trade Commission (FTC), responsible for maintaining fair business practices, to look into the oil and gas industry because the price per gallon is continuously going up even though the price per barrel has been decreasing. This has also been contributing to inflationary pressures.

• So some of the main things to watch out for is what the Fed does over the next few months and whether anything comes out of the investigation into the American oil companies.

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