Inflation: Causes, Effect & Impact
Inflation: Causes, Effect & Impact
It feels like we blinked and prices shot up in an instant. Nationally the average cost of gas is a staggering $4.11 per gallon, when 2 years ago it was just over $2 per gallon. This shock has been compounded with the increase in the costs for groceries, utilities, and housing. It is clear that we are experiencing an inflationary environment, currently at a 40-year high.
Inflation can be described simply enough; items cost more than they used to, resulting in your dollars buying less than they previously could. Many factors contribute to this inflationary environment including the global supply chain, governmental actions, and corporate greed.
The Supply Chain
The COVID-19 pandemic has directly impacted the supply chain. This means that it is more difficult for businesses to manufacture their products and to distribute those products to buyers. Labor shortages are exacerbating supply chain issues. Some workers have left their workplaces for new fields, while others are unable to work after suffering from long term effects of COVID-19. Many young workers, especially, are simply tired of the standard corporate work structure.
Goods that are shipped internationally have been subject to bottlenecks within the supply chain with backlogs at various U.S. ports increasing shortages of certain items. Meanwhile, demand for goods continues to grow. This causes prices to grow as well.
Corporate Greed
While prices continue to grow, some companies have made record profits. In fact, in 2021, many corporations had their highest profit margins since the 1950s while paying their CEOs and other executives record raises and bonuses. Wages for the average worker have largely remained stagnant. Strikingly, while CEO pay rose 14.1% in 2020, median worker pay rose 1.9%.
Government Actions:
The United States government affects inflation by creation of money, changing interest rates, and setting foreign and domestic policy. The Federal Reserve, the U.S. central banking system, specifically attempts to control inflation by raising and lowering interest rates. Higher interest rates discourage spending, driving demand down. In theory, decreasing demand will help lower prices. The Fed can also create more money, increasing supply. As the supply of money increases, typically so do prices. As an emergency measure, the Fed printed new money at an unprecedented rate during the pandemic. They saw this as necessary to keep the economy going.
Further international and domestic policies impacted the rising oil. At the beginning of the pandemic, many countries underwent some sort of lockdown, reducing the demand for oil. No longer having a demand for their oil, producers began scaling back their production. As the pandemic began to wane, demand went back up. Due to the scaled back production, demand was higher than the supply of oil available, causing an increase in price.
Effect:
Inflation, along with the COVID pandemic has further widened the wealth gap in our society. Inflation disproportionately affects low-income workers and communities of color. Throughout the pandemic, people of color were more likely to be hired last and fired first, and while BIPOC and low-income workers were severely affected, economists noted the “K-shaped recovery” for those who already had resources and wealth allowing them to bounce back financially with some becoming wealthier than ever before.
While all have been impacted by recent economic challenges in a variety of complex ways, one thing that is clear is that in many situations, the rich got richer and the poor and got poorer during the pandemic; billionaires became 54% more wealthy during the pandemic, while globally millions of people slipped into poverty.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.