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High inflation in US

Date: 15 January 2022 Tags: World Economy

Issue

Inflation rate in US is at record high, impacting citizens in day to day life. The current rates are in the red zone, forcing federal authorities to act.

 

Background

The effect of high inflation is seen by Americans at the used car lot, the supermarket, the gas station, the rental office.

 

Details

  • Compared to 12 months earlier, the Labor Department reported that consumer prices jumped 7% in December.

  • The “core” inflation rose 5.5% over the past year, which is the fastest since 1991. The rate growth has been more than 10% on majority of consumer goods.

 

The situation

  • Barely a year ago, there was a belief that recession was on the cards after people were confined to their homes owing to the pandemic.

  • The forecast by Fed said that consumer prices would end 2021 only about 1.8% higher than they were a year earlier, below the target rate of 2%.

  • Earlier experts dubbed the sudden spike in rates as a transitionary problem due to shipping delays and temporary shortages of supplies.

  • Since the rates refused to die down, Fed policymakers had been divided over whether to raise rates even once this year. 

 

Causes of inflation spike

  • It was believed that economy was set for a record recession as consumption dipped, employment rates dropped, investments were reduced and service sector fell apart.

  • The turnaround occurred after the Federal government pumped in money in form of aid and money infusion. Interest rates were slashed by Federal Reserve.

  • As people started coming out, business were unable to meet demands. Ports and freight yards couldn’t handle the traffic as supply chain shattered.

 

The rise

  • Companies transferred the high cost to consumers, who had staked in savings during the pandemic induced lockdown.

  • The relief package announced by President Biden to every household overheated an economy that was already sizzling on its own.

 

Lasting of inflation

  • The prices set to stay for some more time as companies struggle to keep up with consumers’ demand for goods and services. 

  • The boosting jobs creation has ensured that Americans have money to spend on goods, further increasing prices. Control over money supply can ease some inflationary trends.