US Inflation is not new to the world. Reasons like Peal Harbour Tragedy to Tax Cuts have led to inflation and hyperinflation in the United States of America. Moreover US Inflation in 2022 is the most complex macro backdrop in the past 100 years.
US Inflation in February 2021 was 1.7%, just under the Federal Reserve target. Since then the number has dramatically increased from 4.3% to 8.5%. In addition, it is the highest inflation rate the US has seen in 41 years. Therefore let us see what led to inflation in 2022.
Too much money chasing too few Goods is InflationClassical Definition of Inflation
When inflation rises, people can buy fewer goods. It shrinks the purchasing power of any currency. Rise in price is not only problematic for consumers, input prices rise too. This leads to less revenue and ultimately less profits. It is also a problem for businessmen.
Reasons for US Inflation 2022
Two major reasons led to inflation in 2022. First is the after-effects of COVID-19 on the economy. Secondly, the war between Russia and Ukraine affected the economy.
US situation in COVID-19 was as bad as any country. The increasing number of deaths and helplessness with a failing healthcare led to rescue plans. Hence, a total of $1.9 trillion was supplied into the economy. It was called the American Rescue Plan.
The American Rescue Plan was signed in March for boosting the economy. Amazon Founder, Jeff Bezos has openly criticised the actions of the White House. According to Bezos, this led to a spike in inflation. It has affected the poor families of the US.
Due to huge supply of money in the economy, purchasing power of middle class income group rose. This led to excessive buying of the limited resources. According to Moody’s Analytics, U.S. households are spending $341 per month more than a year ago.
COVID-19 severely affected the supply chain industry. Which in turn led to food and raw materials shortage. Hence, more demand and less supply of goods led to rise in price.
Russia and Ukraine War
Both Russia and Ukraine are a rich source of natural gas. They not only supply energy to the US but also Europe to a large extent. War between Russia and Ukraine led to sanctions on Russia. Hence a shortage of natural gas and energy was inevitable.
Post COVID-19, demand for oil was already high. After Putin’s invasion on Ukraine, oil prices soared high. Thereafter, one barrel of oil costs $110. Retail price of gasoline increased 19.3% to $4.32 a gallon. Gasoline price in May 2020 was $1.94 but now it stands at $4.33. This also led to increase in transportation cost. By now, oil prices have surged a 3 years high in the US.
After-effects rise in price
- Prices everywhere have soared leaving nothing behind in the hands of common man.
- Services cost have increased by 4.8% from a year ago, the biggest advance since 1991.
- Motor Vehicle service increased by 4.3% from January, 2022.
- Index of personal care goods jumped an unprecedented 1.2%.
- Goods and residential investments saw an unprecedented jump. It is the highest since 1960.
- This year saw the largest increase in price in new cars and trucks.
- Goods inflation rose by 13%, highest since 1980.
- Prices for merchandise continued to rise in February.
- Consumer Price Index for goods and services continued to rise. It is the highest since 1980.
In a recent survey, rise in price is the biggest concern among the common man in the US. 70% of the people feel that inflation currently is the biggest social issue. Rise in price has affected one and all. Even the jobs recovery seems to have plateaued.
Stocks and businesses too are affected from inflation. Usually inflation is good since companies and stocks grow when the inflation is within the range. But with excessive inflation, a situation of stagflation occurs. This means the prices of goods in the economy are consistently rising but stocks show no improvement in growth.
Overall the scenario looks a bit tough, especially on the stocks. Retail investors are advised to use and invest their money smarty. It is always a good time to rethink how we spend our money. Periods like these help us in being cautious. We understand the value of money. Savings is always a good option, cost cutting help us in the long run.