During an economic crisis that has seen inflation hit a 40-year-high, the Federal Reserve has admitted that they don’t understand the economic phenomena. Jerome Powell, Federal Reserve chairman, stated that the national bank struggles to understand what is causing inflation.
As America faces the highest inflation among developed nations, the government says that they don’t know what’s causing it. What happened? Here are 5 reasons why the current soaring inflation is different than in the past and what Americans can expect for the future.
1. Inflation Has Hit A 40-Year High
Inflation is something that comes and goes, but in 2022 it reached heights not seen for four decades. America has seen some tough economic times, including the 2008 recession under Barak Obama. The last time that inflation soared this high, President Jimmy Carter was running the show.
At that time, the Iran oil embargo drove gas prices sky-high while economic mismanagement and government spending crippled the economy. The last time inflation stood at 8.5% was before Ronald Reagan took office in 1981.
Under the Reaganomics strategy, inflation, interest rates, and unemployment fell faster than they did under Carter or under George H. W. Bush and Bill Clinton.
- Between 2017 and before the pandemic, inflation fell in a somewhat steady decline with a 0.58% rate in 2019 down from 0.63% in 2018.
- Now inflation has continued to climb, rising 9.1% in June 2022 alone.
- Today, the rate is at 9.06%, up 8.58% from the beginning of last month and 5.39% from 2021.
Although pandemic supply-chain issues and the war in Ukraine contributed to surging prices, federal policies help drive inflation while the federal central bank controls interest rates than can help decrease inflation.
Raising interest rates makes it more expensive for people to borrow money. In the past, it has helped control spending which can help the economy cool down.
While hiking interest rates can help keep inflation contained, it also creates an imbalance between supply and demand. This in turn can create more inflation as the government pumps money into an economy to create a fake economic boom since more money doesn’t automatically make factories pop up or create new jobs.
In fact, the government can fight inflation by raising wages and setting price controls. But while the Feds can stop the credit flow, they aren’t slowing down government spending, including stimulus packages. This in turn helps drive inflation through the roof.
2. It’s Not Transitory
Inflation used to come and go. You saw periods of recession interspersed with economic stability and prosperity.
According to the federal government, this pattern is in the past. In 2021, the Federal Reserve announced the “transitory” nature of the current inflation. Faced with a worsening situation, Jerome Powell admitted that the current state may not actually be transitory.
Since the Fed can’t agree on what caused inflation or define its source properly, it is hard for them to get control of it.
If current energy policies ship supplies overseas instead of using them to resolve the fuel and utility crises, work regulation is tightened, federal income and capital gains tax increased, and government spending is not reined in, Americans are likely to face money woes for basic goods and services for an extended period of time, and should recalibrate their budgets.
3. The US GDP Shrank After The Pandemic
Inflation doesn’t just appear. It’s the result of rampant spending that pours money into an economy faster than jobs are created and policies that reduce resources and make them more difficult and expensive to get.
While supply-chain shortages did exist during the height of the pandemic due to COVID cases and lockdowns, that doesn’t explain why America’s gross domestic product dwindled by 1.6% from January – March 2022 according to a report from the Department of Commerce.
A shrinking US economy has fueled fears about a recession. Meanwhile, the White House and the media claim that the economy is booming. Powell has stated that although the war didn’t cause inflation, he states that it plays a role by making it more difficult to secure price stability.
4. The Fed Hiked Interest Rates
The Fed has finally admitted that inflation isn’t transitory. As a result, they have made a radical decision to impose a series of big interest rate hikes. This means that the Feds voted to hike interest rates three-quarters of a point. For perspective, the last time, the government increased interest rates that much was under Clinton in 1994.
Many people believe that inflation is solely caused by factors outside of the central bank’s control. The economy had started to recover from the pandemic. Now, many people think that the central bank didn’t cause inflation issues and can’t fix the problem.
Hiking interest rates by 75% is a high-risk move because the central bank is betting that tightening credit will cool the economy enough to restrict inflation without breaking the economy so much that it triggers a recession. It is a tightrope walk.
5. Extreme Government Spending Has Sent Prices Skyrocketing
According to government reports, the economy has experienced explosive growth after the pandemic. However, reports about a thriving economy are in direct contrast to data stating that jobs have plummeted in the past two years.
How does a booming economy have higher unemployment and fewer jobs? A couple observations:
- Washington poured a $5.2 trillion fiscal stimulus into the economy.
- This created a fake economic boom but did not result in a significant real increase in economic activity.
- Add in the estimated $4.8 trillion contributed by the Fed, and that comes to around $10 trillion in stimulus funds.
- In return, this giant stimulus only brought in $2.3 trillion in growth.
Pouring tons of cash into the economy in a short time doesn’t magically create real economic growth. It creates inflation. That’s because there’s too much money flowing after too few services and goods.
It’s an unsustainable scenario that explains how the economy reportedly grew by 10.1% in 2021 while the real GDP increased by only 5.7%, only to plummet earlier this year.
The bottom line is that the American Rescue Plan didn’t work. With over-the-top spending that plowed excessive amounts of money into the economy, the government created an illusion of economic prosperity. Sadly, the economy struggled to keep up with false growth.