Despite the end of the consistently rising price trend, persistently high inflation rate is expected to persist for some time to come. According to the Labor Department, the consumer price index climbed 0.1% in August over the previous month. Experts predicted a 0.1% drop. Compared to last year, consumer prices increased 8.3% in August, which was more than the 8% increase that was anticipated.
That’s a decrease from July’s annualized 8.5% increase, but it’s still relatively high overall. There was bad news in the otherwise positive August inflation data, which concerned food costs. As a result, the gasoline price index dropped by 10.6 percent in the month, adding to a fall that began in late summer.
Inflation: What Is It and Why Does It Happen?
As a result of inflation, consumers have less money to spend over time. The average price rise of a basket of goods and services over a specific period can estimate the rate at which buying power is dwindling.
A unit of money is worth less now than it did in the past due to increased prices, typically stated as a percentage. Deflation, in which prices fall, and people have more money to spend, is the polar opposite of inflation.
What Causes Inflation?
Inflation has its roots in an increase in the money supply but can manifest in various ways depending on the specifics of the economy. To boost a country’s money supply, the central bank can do any of the following:
- Print and distribute more money
- Devaluing legal tender
- Creating reserve account credits by buying government bonds from banks on the secondary market
Falling CPI Inflation
In the headline, After June’s stunning 9.1% spike, the August CPI data shows the inflation rate has slowed for two consecutive months.
If any group of Americans could have forecast the fall, it was probably drivers. After jumping 11.2% in June, the gasoline index has dropped for two consecutive months.
However, motorists shouldn’t rest easy just yet. Gas prices fell 6.1% in April but have since risen again; they are still 26% higher than last year.
Hotter Core CPI Than Headline Inflation
But food and energy costs tend to fluctuate, even though they are essential to household budgets, and this is why the Fed and economists usually look at core inflation carefully.
The figure on core CPI, though, highlights how much more the Fed must do. Based on this measure, costs are up 0.6% from the previous month and 6.3% from last year’s time. That’s far more than the Federal Reserve’s goal of 2%.
Providing a haven for people was a primary motivation. In August, home prices increased by 0.7% and are now up 6.2% from a year ago.
The most recent inflation figures are the result of some murky information. There was a net gain of 315,000 employment in August, and earnings had increased by 5.2% annually.
The Fed’s No. 1 Foe Is Still Inflation
The Federal Reserve’s primary adversary in 2022 has been inflation. U.S. monetary policy has seen significant shifts as the Federal Open Market Committee strives to reduce inflation to its long-term objective of about 2%.
The Federal Open Market Committee continued a streak of monthly increases to the federal funds rate target range by increasing it by 75 basis points in July.
Inflation may have peaked, but price increases are still substantially over what the Federal Reserve is comfortable with and haven’t slowed down significantly. For this reason, it appears that the FOMC will raise interest rates by another 75 basis points at its upcoming meeting on September 20-21. According to the CME Group’s FedWatch calculator, market participants anticipate a rate rise by the Federal Reserve of 75 basis points.
Could Inflation Cause a Recession?
The Federal Reserve has a tricky balancing act. It needs to quickly raise interest rates to bring down inflation without causing a recession in the United States.
The cost of borrowing money for businesses and individuals rises when interest rates rise, which chills spending and production. Although the job market in the United States has been strong so far this year, Wall Street is worried that the economy won’t be able to handle rising interest rates, as seen by the S&P 500’s 13.8% drop this year.
Fund managers often utilize discounted cash flow models to set their price goals, making growth equities especially vulnerable to increased interest rates. As the discount rate rises, the present value of future cash flows is reduced.
Related: How To Achieve Financial Stability Before Turning 30
Pros and Cons of Inflation
Based on one’s perspective and the transition rate, inflation can be either beneficial or detrimental.
Pros
- Certain people may welcome inflation because it drives up the value of their domestic currency-priced assets. It them more attractive to potential buyers.
- The expectation of higher returns than inflation motivates many people to invest in stocks of publicly traded companies and encourages corporations to engage in riskier ventures. Some argue that a moderate inflation rate is preferable to zero because it encourages spending rather than conserving.
- The motivation to spend now rather than save and spend later may increase if the value of money declines with time.
Cons
- Consumers who wish to purchase such items may be dissatisfied if prices rise due to inflation. Some citizens may dislike inflation because it reduces the purchasing power of their domestic currency holdings, such as cash and bonds.
- Gold, commodities, and REITs are all inflation-hedged asset classes that might help investors hedge their portfolios against rising price. It’s also possible to capitalize on inflation using security linked to price increases, called an inflation-indexed bond.
- The consequences to an economy from high and fluctuating inflation rates can be substantial. Companies, employees, and customers alike need to factor the effects of inflation into their purchasing, selling, and budgeting strategies.
How Does Inflation Affect Things?
There are several ways in which inflation may influence the economy. If inflation weakens a country’s currency, exporters may gain since their products would become more competitively priced in overseas markets.
But it might hurt importers by increasing the cost of goods manufactured elsewhere. Higher inflation might boost expenditure as customers rush to buy things before prices climb. However, savers risk seeing their funds’ purchasing power decline due to inflation.
Here, I conclude my article “Why Is There Such a High Inflation Rate.” Stay tuned for more informative content, or visit our Finance category page.
