Inflation 101 and why everything costs more
A closer look at how it began, how long it will last, what’s next
It’s not your imagination. Everything from a loaf of bread to a gallon of gas has skyrocketed in price over the past year.
Airline tickets are up 24 percent, men’s suits nearly 15 percent, bacon 18 percent. Energy costs 32 percent.
Inflation soared over the past year at its fastest pace in more than 40 years, the Labor Department reports.
For the 12 months that ended in March, consumer prices rocketed 8.5 percent. That was the fastest yearover-year jump since 1981, far surpassing February’s mark of 7.9 percent, itself a 40-year high.
Costs for food, gasoline, housing and other necessities are squeezing American consumers and wiping out pay raises that many have received.
When did all this begin?
Inflation, which had been largely under control for four decades, began to accelerate last spring as the U.S. and global economies rebounded with speed and strength from the brief but devastating coronavirus recession that began in spring 2020.
The recovery, fueled by huge infusions of government spending and super-low interest rates, caught businesses by surprise, forcing them to scramble to meet surging customer demand. Factories, ports and freight yards struggled to keep up, leading to chronic shipping delays and ultimately the ballooning of prices we are seeing today.
Who’s to blame?
Critics blamed, in part, President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own. Many others argued that the Fed kept rates near zero far too long, lending fuel to runaway spending and inflated prices in stocks, homes and other assets.
A closer look
Prices were 8.5 percent higher in March than a year earlier.
According to one of the latest studies detailing the impacts of inflation on consumer spending, the top 12 categories affecting consumers’ daily lives the most include:
■ Gas
■ Groceries
■ Dining
■ Vehicle prices
■ Household goods
■ Rent/mortgage
■ Apparel, footwear
■ Entertainment, recreation
■ Health care
■ Education
■ Travel, hotels, flights
■ Child care
This was according to First Insight, a technology company that gathers real-time consumer data to predict consumer activity in retail markets.
How did we get here?
When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31 percent annual rate in 2020’s AprilJune quarter.
Everyone braced for more misery. Companies cut investment and postponed restocking. A brutal recession ensued.
But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by vast infusions of government aid and emergency intervention by the Fed, which slashed rates. By spring of last year, vaccine rollouts emboldened consumers to return to restaurants, bars, shops, travel and entertainment.
Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough or buy enough supplies to meet customer orders. As business roared back, global supply chains seized up.
With demand up and supplies down, costs jumped. Companies found that they could pass along those higher costs to consumers, many of whom piled up savings during the pandemic.
How long will this last?
Elevated consumer price inflation could endure as long as companies struggle to keep up with consumers’ demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and are adding 560,000 a month so far this year — means that Americans as a whole can continue to splurge on everything from lawn furniture to electronics. Many economists foresee inflation staying well above the Fed’s 2 percent annual target this year. But relief from higher prices might be coming. Jammed-up supply chains are showing signs of improvement in some industries. The Fed’s pivot away from easy-money policies toward an anti-inflationary policy could eventually reduce consumer demand.
What’s next?
Measures of inflation will likely worsen in the coming months because recent reports don’t reflect the consequences of Russia’s Feb. 24 invasion of Ukraine. The latest evidence of accelerating prices will solidify expectations that the Federal Reserve will raise interest rates in the coming months to try to slow borrowing and spending and tame inflation. The financial markets now foresee much steeper rate hikes this year than Fed officials had signaled as recently as last month. The overall economy is healthy, with a robust job market and extremely low unemployment. But many economists say they worry that the Fed’s steady credit tightening will cause an economic downturn.