The most amusing part about the current inflation hysteria is that everything happened so quickly.
The first Covid wave swept through the United States last spring, causing more than 20 million Americans to lose their jobs and plunging the country into its worst recession in recorded history. With the economy contracting by 31.4 percent in the second quarter of 2020, the last thing on experts’ minds was rising prices. After all, for a brief period of time, oil prices had fallen below $0.01 per barrel.
However, it turns out that the worst recession in American history was also the shortest—by a long shot. Many Americans were able to weather the storm because to government stimulus measures totaling over $6 trillion, and many of them, loaded with cash but confined to their homes, went full Extreme Makeover.
Consider the following: Consumer expenditure on products was roughly 26 percent greater in August 2021 than it was in January 2019, according to the Census Bureau.
The demand component of the price equation is only one of several components.
And while demand for commodities increased dramatically, supply could not keep up with the need. Because of a variety of factors, including regular Covid lockdowns in Asia, widespread labour shortages, and sloppy planning, producers were unable to create and ship enough items to fulfil customers’ insatiable cravings for commodities.
As a result of this severe demand–supply imbalance, prices began to rise gradually in late 2020, before gaining significant momentum as the calendar year 2021 approached and the ball dropped. Although the consumer price index, which measures changes in the prices of a basket of consumer items, increased by 1.7 percent yearly in February, the index increased by 5 percent in May.
The increased inflation estimates in spring 2021 were attributable to a small number of items that had a disproportionately large impact on price increases. Recall all the hoopla about used cars? They were responsible for more than one-third of the monthly price hikes in June, if you remember back. It was this bizarre dynamic that provided ammunition to policymakers, including Federal Reserve Chair Jerome Powell, who maintained that inflation was “transitory” and would eventually decline once a few pandemic quirks were smoothed out.
Team Transitory, on the other hand, is currently on the defensive. It has been reported that inflation has moved from used automobiles and energy to commodities across the economy, including rentals, food, and clothing, this fall. Meanwhile, salaries are increasing dramatically, which is fantastic for employees but also contributes to inflation because businesses must raise the prices of their products to compensate for the increased labour expenses.
Consumer prices grew at their quickest rate in 31 years in October, and economists are still discussing when the rate of inflation would reach its apex.
So that’s how we got to where we are now.