Record-High Inflation in the United States: How it happened

By Abhinav Nath Jha | Edited by Ashna Ranade

Inflation is a term  that we as Indians are pretty much used to. Wholesale price indices keep fluctuating in India, as a result of which we see an increase in prices of goods such as vegetables, dairy products and edible oils. Yet, inflation is not an unexpected force in India since it is a growing and developing economy. In developed countries such as the United States of America or the United Kingdom, inflation figures tend to remain low consistently for decades as these economies grow at an extremely slow rate. Thus, when the USA recorded its highest inflation figures in the last forty years, it became an interesting phenomenon to explore.

As things stand currently, the USA recorded an inflation level of 7% in December of 2021 when compared with that of 2020. The last time inflation levels were so high was in 1982. The occurrence of such a situation is not an overnight phenomenon. For the past 7 months continuously, the consumer price index levels have stayed above 5%. There are several categories of goods and services that have seen a dramatic rise in their prices. For instance, the energy sector has seen a price rise of 49.5 % on a year to year basis with gasoline and natural gas witnessing a price rise of 50% and 28% respectively. Similarly in the used vehicles category, prices of used cars and trucks have gone up by 26.4%. (Routley, 2021) Even in the case of everyday grocery items such as milk, eggs, poultry, fish and meat have seen their prices increase by 12.8% in November according to the food at home index prepared by the Department of Agriculture. (BEA, 2020) According to projections by economists Patricia Sanchez Juanino, Corrado Macchiarelli and Barry Naisbitt, the coming months would still be seeing a high annual inflation rate of 5% even as June 2022 could record a monthly inflation level closer to the time period of 2015-2019. Even if monthly inflation remains constricted to 0.3%, the annual inflation rate would still stand at 4%. 

Before analyzing the reasons behind the current levels of  high inflation being experienced in the United States, we first must understand why ‘inflation’ is an oddity to begin with, in a developed economy. Since developed countries have a strong infrastructure setup in terms of manufacturing and market spaces, supply and demand forces are mostly in perfect sync with each other which brings about stability in commodity prices. In fact, for at least the previous decade, the United States saw price levels remain below the 2% mark which indicated that there was a bigger supply base for a product as compared to its demand base. Owing to the pandemic affecting the entire globe from 2020 onwards, not even the American economy was spared and that fundamentally changed a lot of things.

The United States recorded a negative GDP growth rate of 34.3% in the second quarter of 2020. By May 2020, 20.6 million jobs were lost which led to an unemployment rate of 14.7%. In order to revive the economy, both the Trump and the Biden administrations signed pandemic related relief packages that totalled 3 trillion USD which involved giving direct checks to people belonging to lower-income brackets and also passing on certain financial benefits to people who had gotten unemployed during the pandemic. In addition to this expenditure, another 1.9 trillion USD was pumped into the economy by the Democrat-controlled House of Congress and White House in early 2021. What happened instead, was that the recession lasted for only 2 months, officially making it the shortest ever recorded in the country’s history. The primary agents of this recovery was the massive Government expenditure through stimulus checks, the Federal Reserve lowering interest rates to revive growth and a highly efficient vaccine policy that prompted buyers to visit stores, restaurants and bars with greater confidence by May 2021. (USA Today, 2022)

While there was a great upsurge in demand for goods and services, supply remained restricted and faced several shortages. In order to meet customer demand, close to 10.6 million job opportunities were created in November 2021 but hiring is a long and cumbersome process and those slots were never able to get fully occupied. Also as global supply chains have still not gotten restored to pre-pandemic levels and even the shipping sector has a limited capacity to process such an unexpected demand surge, there were simply not enough goods in a suppliable condition to enthusiastic consumers. Thus, in order to recover costs, companies were bound to increase the prices of commodities and realize their increased costs through consumers. Thus, inflation skyrocketed to such high numbers that have everyone from the Biden Administration, to the Federal Reserve and most importantly everyday buyers on their toes. 

 As things stand today, until and unless, global supply chains do not get restored to pre-pandemic levels and meet the ever-widening demand base, at least for the foreseeable year, inflation will be a constant struggle for American consumers.  

References

Aratini, L. (2022, January 12). US inflation reached 7% in December as prices rise at rates unseen in decades. The Guardian. https://www.theguardian.com/business/2022/jan/12/us-inflation-rate-december-2021

Gross Domestic Product, 2nd Quarter 2020 (Advance Estimate) and Annual Update. (2020, July 30). Bureau of Economic Analysis | U.S. Department of Commerce. https://www.bea.gov/news/2020/gross-domestic-product-2nd-quarter-2020-advance-estimate-and-annual-update

Routley, N. (2021, November 19). U.S. Inflation: Which Categories Have Been Hit the Hardest? Visual Capitalist. https://www.visualcapitalist.com/u-s-inflation-which-categories-have-been-hit-the-hardest/

Schneider, H. (2021, July 20). U.S. recession ended in April 2020, making it shortest on record. Reuters. https://www.reuters.com/business/recession-ended-april-2020-making-it-shortest-record-2021-07-19/

Smialek, J. (2021, October 18). A regional Fed analysis suggests Biden’s stimulus is temporarily stoking inflation. The New York Times. https://www.nytimes.com/2021/10/18/business/economy/fed-inflation-stimulus-biden.html

Soucheray, S. (2020, May 8). US job losses due to COVID-19 highest since Great Depression. CIDRAP. https://www.cidrap.umn.edu/news-perspective/2020/05/us-job-losses-due-covid-19-highest-great-depression

The US may be stuck with higher inflation in 2022, and potentially beyond. (2021, November 29). USAPP. https://blogs.lse.ac.uk/usappblog/2021/11/25/the-us-may-be-stuck-with-higher-inflation-in-2022-and-potentially-beyond/

What is driving US inflation to a 39-year high? The reasons and solutions are complicated. (2021, November 11). USA TODAY. https://www.usatoday.com/story/money/personalfinance/2021/11/11/inflation-rate-

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s