From groceries to gas prices, Americans have been feeling the effects of inflation. With inflation reaching a three-decade high and the annual inflation rate skyrocketing to 7% in the last month of 2021, many Americans are left wondering how long it is going to last, what has caused it, and how, if possible, can we remedy this issue?
Inflation spiked in 2021 due to COVID-19 induced supply constraints, soaring energy costs, labor shortages, increased demand, and, finally, low base effect from 2020. When ultra-low inflation is experienced the previous year, even a small rise in the Price Index can cause high inflation. The biggest contributor to the gain was energy, which rose to 33.3%, as compared to November’s 29.3%.
Fuel prices surged, rising from 49.6% to 58.1%. Shelter prices rose from 3.8% to 4.1%. Food costs jumped from 6.1% to a whopping 16.3%. As if a car shortage, brought on by limited production capacity, wasn’t bad enough; the cost of both new and used vehicles rose as well. New vehicles had a .7% increase (11.8% vs the previous 11.1%) and used vehicles saw an increase of 6%, with prices climbing from 31.4% to 37.3%. Finally, the cost of medical care services rose from 2.1% to 2.5%, which is not exactly ideal in the middle of a large-scale pandemic, where expensive medical treatments may be needed to combat the effects of COVID-19.
So, how long must Americans endure inflation and its effects? While experts aren’t exactly in agreement, inflationary pressures are thought to be likely to last well into the middle of 2022, where inflation will become moderate instead of high, and unfortunately, this seems to be one of the better case scenarios, with some experts expecting it to continue at a fairly steady rate for several years.
It’s hardly a secret that the cost of living has skyrocketed, while Cost of Living Adjustments (aka COLA’s) are not ample enough to keep up with an ever-increasing cost of living. Many employers do offer small cost of living increases annually. However, inflation outpaces the Cost of Living Adjustment increases. Sadly, employees can usually only receive a salary bump by leaving for another job, with more competitive pay. This, compounded with the “Great Resignation” currently underway is causing a mass exodus of workers and thus contributing to the labor shortage. Even large companies, such as Apple, who give an annual Cost of Living (COL) increase, cap it at around 3%. This is insufficient because employee living expenses rose to around 7%, therefore employees actually lost 4%, despite the raise.
Employers who can (such as the aforementioned Apple), should be making increases that match inflation if they expect employee retention. It would actually be more expensive for larger companies to attract, hire, train, and onboard new employees than it would be to match the COL for every employee. Despite all businesses being hit hard by the pandemic, they need to act quickly, if they want to retain their employees.
Beyond businesses adjusting their COLA to salaries at the rate of inflation, the burden of inflation reduction relies on the government. There are several things the government can do to help inflation, however, that could lead to unintended consequences. The government can use wage and price controls to help combat inflation, however, it can lead to recession and job loss. Governments can also put reserved requirements into place which places controls on the amount of money banks are legally allowed to keep on hand to cover withdrawals. Lastly, the government can implement a contractionary monetary policy that fights inflation by reducing the money supply in a given economy, via decreased bond prices and increased interest rates.
Jerome Powell, Chair of the Federal reserve, to contain the inflation surge, will include raising interest rates. Interest rates tend to have an inverse effect on the economy, meaning when interest rates are high, inflation tends to be low, when interest rates are low, inflation tends to be high. This works because high-interest rates slow businesses, which in turn, lowers inflation.
Despite businesses being hit hard in the pandemic with many businesses still recovering, businesses need to offer more competitive COLAs that match inflationary rates in order to keep their workers. The government needs to implement higher interest rates, to help lower inflation hopefully without further hampering already struggling businesses. Powell pro tighter monetary policies and is optimistic his plan to lower inflation over the course of the next year will be successful, starting in March. This, combined with a strong economy, and coupled with the pandemic hopefully winding down could lead to a booming job market with low inflation and an even stronger economy