Inflation Dissertation | Ariana Thompson

You might remember about a month ago that gas prices reached 6 dollars a gallon, but do you know why?

Inflation, or the rise in price for products and services, remains one of, if not the, biggest concern for free market economies around the world. For those of you not in the know, lately the US has been experiencing a rise in inflation, with the inflation rate reaching its highest peak in July of this year at 8.5 percent; and while we have been able to cut down inflation by a small amount, over-inflated prices still present a huge problem for Americans.

The main cause of our inflation can be attributed to the pandemic. COVID-19 created an environment where our economy would be vulnerable to the worst inflation-creating problems: increasing demand and decreasing supply. During quarantine, Americans weren’t able to spend their money as they normally would when the free market was open, so instead they ended up saving it. Combine that with $1,200 stimulus checks, and Americans suddenly had a lot of disposable income that they could spend when the economy reopened. Additionally, the shutdown of the economy and precautions taken to protect workers when the economy was reopened led to disruptions in the supply chain (AKA. a decrease in products available for consumers). When these two factors combined, it created a shortage of goods and services, which led to higher prices, otherwise known as inflation.

In reaction to inflation the Federal Reserve has declared its intention to curb inflation, Jerome Powell, chairman of the FR has declared, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses”. Senior investment strategist at U.S. Bank Wealth Management, Rob Haworth, had this to say: “I would interpret that as a willingness to see the unemployment rate creep a little higher here to get to that end of reducing demand”.

This most likely means that we’ll be hurting before inflation goes down again. The Federal Reserve will have to implement policies such as raising interest rates and conducting open market operations in order to try to limit rising prices.

Even so, new data released by The U.S. Bureau of Labor Statistics shows that inflation remains high at 8.3% - higher than previously anticipated by economists. Food prices remain especially high, with the BLS reporting an increase of 13.1% over the last 12 months. Other industries hit fairly hard were the transportation industry (for trucks, planes, and boats) and oil and gas extraction industries.

Although we go through inflation as a country, it's often the financially disadvantaged that get hit the hardest. Increases in gas, food, and rent, mean that individuals will end up having to pay more money, money that they may not have. It would be ideal for the Federal Reserve to squash inflation without significantly increasing the unemployment rate, especially considering unemployment will also disproportionately affect those living in poverty, but the alternative of unchecked inflation would be much worse. Hopefully by the time the dust settles, we will all still be here, ready to help those who need it.