How Inflation Rates Have an Affect on the US Economy

Updated: Feb 12, 2022

It’s now 2022 and we are still experiencing the effects that the COVID19 pandemic has had

on our country, its citizens, as well as, our political and economic structures.

December 2021 the U.S. inflation rate was up to a 7.0% increase compared to December 2020. As a nation, we have experienced price increases at the gas pump, on our power and energy bills, our housing market, on food, clothing, vehicle purchases, and medical care services.

Right now we are experiencing a higher rate of inflation than we have seen in three decades, data released by the Department of Labor. Supply and demand play an important role in inflation. Thus, creating product shortages, labor shortages, raw material cost increases, higher demand, and policy decisions on issues like interest rates, tariffs, and government spending. Inflation affects the prices of everything around us.

Disruptions to the global supply chain caused by the pandemic are still causing shortages and driving up the price of goods. The Guardian reported, “ In November 2021 the average price of a used vehicle in the US was $29,011 – 39% more than just 12 months earlier.”

From CBS News, “The Federal Reserve on Wednesday announced that it is accelerating its removal of monetary support for the economy, citing a rise in inflation that has seen the biggest jump in prices in nearly 40 years. In a move to cool growth, policymakers also said they expect to hike interest rates three times in 2022.” This is said to happen as early as March 2022.

Businesses trying to still operate post COVID are struggling the most. Employers are still having a hard time trying to fill jobs. We have seen wage increases in certain industries across the country, but is it enough is to really make a difference? We don't know yet.

The US economy is in a sticky situation right now. Despite the surge in prices, we are still seeing strength in US consumer spending, which accounts for roughly two-thirds of U.S. economic activity.

Consumers don’t exactly have a choice, but to pay the higher prices for necessities like shelter, food, clothing, transportation and gas. If the Feds say this is a good sign, is it really? Who is it benefiting? Not the people.

“Policymakers expect the U.S. economy to grow 4% in 2022 and unemployment to fall to 3.5% by year-end, according to the Fed's latest growth forecast” quoted from CBS News.

The Federal Reserve has been buying $120 billion bonds a month since the spring of 2020 to help provide financial stability for the US economy as a result of the COVID19 pandemic. The Federal Reserve stated on their website, “With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen.” With the strengthening of the economy, it has been said by policymakers and the Federal Reserve that the economy no longer needs increasing amounts of support. Thus, the Federal Reserve has reduced the rate of bond purchases and has ended the COVID relief program. With these changes, we will expect to see an increase in interest rates.

Going into 2022 there are going to be a lot of checks and balances that the Federal Reserve will need to make to get the US economy back on track.

What is Inflation?

Inflation is the rate of price increases of goods and services. As a result of inflation, the value of money decreases over time.

Sourced from nerdwallet.com, “Inflation can be caused by a number of factors, and the many types are characterized by either a root cause or the rate of increase.” Below are the different types of inflation explained more in-depth.

Cost-push. A common cause of inflation is when the cost of producing goods and services increase and push prices higher. This can happen when prices of raw materials or labor costs rise.
Demand-pull. Another cause of inflation is when the demand for goods and services outstrips what can be produced at the time, making prices go up.
Deflation. The opposite of inflation — a negative inflation rate or a drop in prices of goods and services.
Disinflation. A falling rate of inflation or slowdown in the rise in prices of goods and services.
Reflation. A way to curb deflation is when a government purposely stimulates the economy by increasing the money supply or government spending — such as the COVID stimulus payments. Reflation can also happen when a government lowers interest rates.
Creeping. Low or mild inflation with prices rising less than 3% a year.
Walking (trotting). Prices rise moderately, but the annual inflation rate stays in the single digits.
Running (galloping). Prices increase significantly into the double digits, above 10% a year.
Hyperinflation. Extraordinary inflation spiraling out of control, over 1,000% a year.
Stagflation. High inflation even during an economic downturn.

How is Inflation Measured?

The most common system used to gauge inflation is by using the Consumer Price Index (CPI) which is measured by the US Bureau of Labor Statistics. The bureau measures CPI by monitoring the average change in prices paid for a variety of goods and services, classified by eight groups: food, housing, apparel, medical care, recreation, transportation, education and communication, and other goods and services.

To get a more in-depth overview of inflation rates economists includes these multiple indexes:

Consumer Price Index (CPI)
Producer Price Index (PPI)
Personal Consumption Expenditures Price Index (PCE)

The basic formula to calculate the inflation rate is:

(Current Price – Former Price)/Former Price

U.S. Inflation Rate

While it is typical to see prices of goods and services rise at different rates. In a healthy economic structure, inflation increases about 2 percentage points annually. Having a moderate inflation rate that is controlled to be around 2% is good for economic growth. When it deviates from that percentage it becomes uncontrolled and harder to manage.

The chart and table below display annual US inflation rates for calendar years from 2011 to 2021. (For prior years, see historical inflation rates.) If you would like to calculate accumulated rates between two different dates, use the US Inflation Calculator.

Annual rates of inflation are calculated using 12-month selections of the Consumer Price Index which is published monthly by the Labor Department’s Bureau of Labor Statistics (BLS).

It is noted that education and health care costs are generally subject to higher inflation rates than the average inflation rate. Information found on finaid.org, a site that offers financial aid advice, tools and information, U.S. tuition rates are typically more than double the general inflation rate, and on average, increase about 8% each year.

According to the Centers for Medicare and Medicaid Services, national health spending is projected to grow at an average annual rate of 5.4% between 2019 and 2028.

World inflation Rate

A Pew Research Center analysis of data from 46 nations finds that the third-quarter 2021 inflation rate was higher in most of them (39) than in the pre-pandemic third quarter of 2019. In 16 of these countries, including the U.S., the inflation rate was more than 2 percentage points higher last quarter than in the same period of 2019.

For this analysis, data was sourced from the Organization for Economic Cooperation and Development, a group of most highly developed, democratic countries. The data covers the 38 OECD member nations, plus eight other economically significant countries.

The U.S. had the eighth-highest annual inflation rate at 5.3% in the third quarter in 2021 among the 46 countries shown. From the third quarter of 2019 and the third quarter of 2021 - the increase in the U.S. inflation rate was 3.58 percentage points, just below Brazil and Turkey, which have substantially higher inflation rates in general than the U.S.

Before the COVID-19 pandemic each country showed variations of the same pattern: which was relatively low or flat. Then looking into the second and third quarter of 2021 the inflation rates rose the most due to the economic effects of the COVID-19 pandemic.

Sourced from Pew Research, the above map shows that in 2021 for most countries there had been an extended period of low-to-moderate inflation until the pandemic hit. Just a decade before the pandemic hit, 34 of the 46 countries in the analysis averaged changes in inflation rates of 2.6% or lower according to Pew Research. In 27 of these countries, inflation rates averaged less than 2%. With everything we have experienced over the past few years and learning how to acclimate and adapt post COVID-19, I think the main question still on everyone's mind is how do we get our economy back to normal?

The U.S. Federal Government Inflation Projections

Sourced directly from the U.S. Federal Reserve, "The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation." Below is a table of economic projections of the Federal Reserve Board Members:

Projections released by the central bank is that there will be three interest-rate hikes in 2022 and three more in 2023. According to CBS News, "Economists said the rate hikes could begin as soon as March, but some expect economic weakness to push lift-off until the summer." Federal Reserve Jerome Powell noted that, "high inflation could dampen the economic recovery by canceling out the wage gains that lower-paid workers have made in recent months amid a widespread labor shortage. We have to make sure that higher inflation doesn't get entrenched. It's one of the two main threats, the other being the pandemic, to getting back to maximum employment."

In Conclusion

While there is a great deal of uncertainty, just like anything else, all we can hope for is that it will get better sooner rather than later. We know that there is a plan in place, no it's not perfect, but it is consequential to the choices the U.S. political and economical leaders made in respect to the COVID-19 pandemic.

What do you think? Will this plan work? What risks do you see now and futuristically? Leave a comment below.