In the past few months, Americans have seen prices skyrocket for many essential goods and services. With wages unchanged, this inflationary trend has left many people frustrated and worried about the future.
The latest consumer price index (CPI) reports an increase in inflation of 7.7% compared to last year (a 40-year high). This inflation data shows that the average American household is spending more each month on basic living expenses.
The question arises: why is inflation so high?
While there is no single factor that could fully explain this trend, there are several key factors that have contributed. Here are some of the culprits:
Too much money in the system
The COVID-19 pandemic has necessitated an extended lockdown that has kept people in their homes and businesses closed. While this helped contain the spread of the virus, it led to an oversupply of funds in the system.
People spent less, but there was an abundance of cash, which led to inflation. America’s economic stimulus package was an additional influx of funds into the economy, further fueling inflation. From 2020 to mid-2021, Americans had $2.3 trillion in additional savings, according to the Federal Reserve, which is a lot.
All this was exacerbated by shortages of everything from food to other household items, so people had fewer purchases. In the end, people began to spend on what was left, and thereby raise the prices of these goods.
Supply and demand imbalance
When the demand for a product exceeds the available supply, the price rises. People are willing to pay more for goods when there are not enough of them, which increases inflation.
At the height of the pandemic, with spending down and savings up, demand for goods and services declined. But now that we have come out of this crisis, people are more willing to spend money, increasing demand.
The problem is that businesses need to increase supply faster to keep up with rising demand. Delivery delays, lack of staff, etc. all added to the problem.
Supply chain disruption
Supply chain problems often have a devastating effect on commodity prices. Without critical resources, businesses cannot operate optimally, resulting in supply shortages.
Amid the pandemic, several U.S. businesses have experienced supply chain disruptions, including lack of drivers, capacity issues with logistics providers, delivery delays, increased freight costs, labor shortages, etc. All of these issues have had a significant impact on prices. goods.
To address some of these issues and lower prices, the Bureau of Labor Statistics (BLS) is reporting a 1.2% increase in wages and salaries to incentivize employees and higher starting wages for new hires. While this move may help, many businesses are still struggling with supply chain issues and will take time to resolve.
War in Ukraine
Russia’s invasion of Ukraine has significantly affected world commodity prices, causing inflation. The ongoing war has reduced the supply of oil and gas, food and metals, driving up the cost of these commodities.
Sanctions from a number of European states and the United States have not yet helped in this situation. While these sanctions were meant to punish Russian aggression, they also caused serious damage to the rest of the world.
In response to the sanctions, Russia continued to cut exports of these essential goods, further pushing up prices. As winter approaches, this could create additional problems for countries heavily dependent on Russian gas.
Rising energy prices
Every company needs energy to run its business. Thus, rising energy prices will inevitably affect the prices of food and other essential commodities.
Sanctions against Russia led to a reduction in oil and gas supplies to the rest of the world, which directly affected other goods and services. Production, transport and transportation costs have risen as energy prices have risen.
Joe Biden’s total ban on Russian oil and energy imports as early as March 8, 2022 also affected oil prices. Companies responded by raising their selling prices to keep up with production costs.
Reduced interest rate
The Federal Reserve has cut interest rates since the pandemic to help people access loans at more affordable rates. The move helped US households secure funds but contributed to prevailing inflation.
With limited spending options and everyone staying at home, more people are holding on to their money. Pair that with the government’s relief fund and you’ve got the perfect storm for higher inflation.
While the Fed has been raising interest rates slightly in recent months, the 2% annual inflation target is still far from being met.
Higher wages
Demand for labor has risen since the pandemic due to increased consumer spending. Excess demand is associated with tons of cash in household bank accounts and a shortage of supply due to shortages of workers and goods.
Many businesses have increased starting wages and compensation to fill vacant positions and encourage workers to stay. The BLS reports that workers’ compensation has risen 5% over the past year. It is only moderately effective in curbing inflation. Why?
When businesses raise wages, they inevitably have to raise prices to remain financially viable. And as prices rise, people demand higher wages to offset higher costs, creating a vicious inflationary cycle.
What are the feds doing about high inflation?
The Federal Reserve (like other central banks) helps ensure a stable and sound economy by creating an environment conducive to sustainable economic growth while maintaining financial stability. The Fed made its best move by raising interest rates in response to inflation.
Over the past few months, the Fed has raised interest rates several times to bring inflation down. This temporary measure may take several months or years to achieve price stability. However, they must be careful with these changes because a wrong move could lead to a recession.
The last rate increase was at the beginning of November, bringing the discount rate to 3.75-4%, the highest level since December 2007. This means that borrowing will become more costly, which will reduce the number of people who have access to loans. The goal is to slow spending and ultimately inflation.
Also, with fewer buyers, sellers will be forced to cut prices to retain customers. Over time (no one knows for how long), this could slow the rise in costs and inflation.
How to survive high inflation
If there is one thing we have learned from inflation, it is to be resilient and flexible in adapting to changing financial conditions.
The effects of inflation are far-reaching, affecting your finances and quality of life. To help you navigate the changing economic landscape, here are some tips on how to survive high inflation:
Create an emergency fund
A big cushion in your savings account will help you weather any economic shock. Try to increase your reserve fund to cover at least six months of expenses so that you can maintain your standard of living and pay for unexpected expenses.
save more
The best way to protect yourself from inflation is to save more; it means setting aside a percentage of your income for some return on investment. But you have to be strategic. For example, there may be better options than putting money in a traditional savings account, as interest rates are low and they may need to catch up with inflation. Instead, consider investing in stocks or high-yield accounts that provide higher returns on your funds.
Reevaluate spending habits
It’s time to take a step back and evaluate your current spending habits. Are you overspend? Consider lowering your overhead by cutting back on things like restaurant meals, subscription services, gym memberships, etc.
Focus on the essentials—utilities, rent or mortgage, food, and transportation—and find ways to spend less on other things. With these simple changes, you’ll be amazed at how much you can save in the long run.
Look for additional sources of income
If you’re struggling to make ends meet, consider taking on a part-time or freelance job. This can be anything from working as a tutor or dog walker to driving in shared services.
The extra income can help cover the cost of living and give you the life you’ve always dreamed of. It can also give you a sense of financial security and independence, which is vital in these uncertain times.
Become a bargain hunter
These times require creativity and resourcefulness to stay afloat. In other words, be more mindful of the price of items and how you spend. This period is an ideal opportunity to study and compare prices, search for coupons and search for sales and discounts.
Use apps and credit cards, make deals on coupon sites, take advantage of seasonal sales, and buy in bulk to keep your costs as low as possible.
Get ready for the long haul
It has been more than a year since inflation began to pick up, and the effects of the Fed’s policy changes will take some time to show. As a result, you may need to prepare for the long term and make financial changes.
Despite the current inflation rate and rising prices, you can still survive and thrive in this volatile economic climate. You can weather the storm and become stronger by being flexible, proactive, and strategic with your money.
This article originally appeared on Geek Wealth.
