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Current Affairs

High US inflation

Date: 18 April 2022 Tags: World Economy

Issue

Consumer prices in the United States have rocketed to 8.5% in the month of March in this financial year.

 

Background

The highest such rise was 7.9% that was witnessed in February, which itself was highest in the past 40 years.

 

Details

The core inflation has seen rise to 6.5% in the last 12 months. The volatile food and energy prices push the rate even higher.

The growth is even higher than US Fed’s anticipation, which had predicted in 2020 that consumer inflation would stay below their 2% annual target and end 2021 at around 1.8%.

 

Observations

Policy makers argued earlier that the higher inflationary rates were transitory due to shipping delays and temporary shortages of supplies after the pandemic.

The recent trend shows that inflation seems to stay for the upcoming days as demand has outstripped supply.

 

Actions

The US Fed was forced to raise benchmark short-term rate by a quarter-point and will probably keep increasing.

It will seek to reverse the liquidity in the market that had helped revive the economy but also fuelled high inflation.

The main intention would be to rein in inflation without weakening it so much as to trigger a recession. 

 

Start of crisis

Following the paralysis of economy due to pandemic, the government and US Fed intervened to revive. Funds were infused and rates were slashed.

Businesses started to bloom and the demand outpaced supply as supply-chains failed to reinstate on time.

Cost of products began to rise and companies passed along the higher prices to customers in order to reduce their burden.

Critics argue that President Biden’s $1.9 trillion Coronavirus relief package for overheating the economy. The US Fed rates of near zero were also criticized.

 

Way forward

Higher inflation is eroding purchasing power of consumers and many of them have stopped spending to save.

The US Fed has indicated that easy money policy will be curtailed to prevent people from borrowing or spending.