Not only did the year 2021 have the most difficult challenges for many individuals mentally, but it also damaged the world financially, mainly due to inflation. Inflation is the rise in the prices of goods and services which reduces a currency’s “purchasing power”, meaning that one will need more money to buy as much as one did in the past. For example, $1000 couldn’t buy you the same things now it could have 10 years ago.
We have had it worse in the past. These periods occurred after both world wars and during the Great Inflation, which spanned from 1965 to 1982. Such rises in prices helped to precipate recessions and The Great Depression. During the Civil War, the U.S. came closest to reaching hyperinflation, when the inflation rate exceeds 50%.
“between 2011 and 2020, the average value for an acre of farmland rose by 37 percent, the median sales price for a house by 58 percent and the Dow Jones industrial average by 147 percent.”
More recently, the rates of prices have drastically increased in the years leading up to 2021. According to The New York Times, “between 2011 and 2020, the average value for an acre of farmland rose by 37 percent, the median sales price for a house by 58 percent and the Dow Jones industrial average by 147 percent.”
In 2021, the inflation rate was 6.8%, which was the highest since 1982. Prices of rent, cars, groceries, gas, appliances, and electricity all increased dramatically. Many blame inflation on the pandemic, although prices continued to rise after the peak of Covid-19.
The simplest explanation for inflation is because of too much demand with too little supply. For example, car prices rose because of chip shortages and low inventory, and rent increased because of high home prices and supply chain issues restricting the construction of new homes. These supply problems are primarily due to the pandemic which continues to result in major delays in shipping, while the increased demand is because of the sudden high spending after lockdown.
“economic activity has trended only a few hundred billion dollars a year short of what mainstream analysts would consider full health”
Another contributing factor to inflation is the $2.8 trillion in federal money from Biden’s Administration for the stimulus checks. Their plan didn’t have the entire results they were hoping for. The New York Times article says, “economic activity has trended only a few hundred billion dollars a year short of what mainstream analysts would consider full health” for last year. This means that there was too much money spent compared to the number of goods being purchased. Most of the spending from the government replaced lost incomes instead of increasing economic activity to the extent they needed.
Economists predict inflation to make a big impact this upcoming year as well. The November Consumer Price Index predicts that the inflation rate will reach 7% in Quarter one of 2022, but will drop to 2%-3.2% by the end of 2022 and 2.3% by the end of 2023. The prices of cooking ingredients and transportation will increase, in addition to the items that increased in 2021.
The company Mondalez, which includes the brands Oreos, Ritz, and Chips Ahoy, is planning to raise their prices by 7% starting in January, along with Kraft Heinz Co., General Mills, and Campbell Soup. The main reason for these changes is supply and demand. For instance, the cost of bottles and cans will escalate since there aren’t enough containers, the price of seafood will grow because it is imported by ship/plane, and weak wheat harvests will cause pasta prices to surge.
Moreover, there will be higher wages and labor shortages if inflation continues. The U.S has lost about 4 million workers since the start of the pandemic. Thus, the demand for labor is higher. To attract more workers, the U.S. workers’ hourly pay has increased by 4.8% over the past year. As companies increase wages, they will need to increase the prices of their products to cover the cost. Inflation can thus end up being a vicious cycle.
The government made announcements that would reduce the impact of inflation last year. In November of 2021, Biden said he would “tap” oil reserves to produce more supply and decrease prices. The White House investigated oil companies to determine any price gouging. By holding major oil companies responsible for unreasonable prices, the administration hopes to offer relief for working families.
“President Biden’s safety-net and infrastructure plan would bring down costs for working-class families, including for housing, health care, groceries, gasoline, elder care, child care, and education.”
The Biden administration is also leaning on The Federal Reserve to tame the rate of inflation through bond-buying programs and raising interest rates. This may cause consumers to save since the returns from savings are higher, which results in the economy slowing and inflation decreasing since people are spending less. In addition, The White House is trying to bring down the prices of goods and services gradually. As mentioned in The Washington Post, “President Biden’s safety-net and infrastructure plan would bring down costs for working-class families, including for housing, health care, groceries, gasoline, elder care, child care, and education.” Moreover, Jerome Powell, the chairman of the United States Federal Reserve, says the most effective way to stabilize the economy would be to end the pandemic since the recent wave of cases resulted in closings and worker shortages. Whatever it might be, it is very important to solve this problem before it progresses into worse issues.
Inflation has affected each American in some way and has eclipsed this country’s other financial problems. If inflation continues, the cost will likely be disastrous for both businesses and the government.