The Reasons for Our Extreme Inflation

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Inflation — it’s the only thing anyone is talking about. And no wonder, because inflation is at an all-time high in the United States, the highest it’s been in 40 years. But why? That is the question we, as a society, are trying to answer right now; why is inflation so high and what can we do about it?

In truth, economists and politicians can point fingers all day, but the reasons for our inflation are many and varied.

The Federal Reserve and its leader, Jerome Powell, were caught off guard by the current seven percent inflation rate we have today. While that might not seem like a huge percentage, bear in mind that inflation sits around two to three percent. By comparison, it is not an over-exaggeration to say that our current inflation is extreme. Alyssa Fowers and Rachel Siegal, for the Washington Post, provide data driven observations as to why inflation is so high.

What is Inflation?

First, it’s important to understand what inflation is and how it effects the economy. According to Investopedia experts, the simple definition for inflation is when an economy’s currency has less purchasing power. As a result, prices tend to rise, and people can’t buy as many goods or services. To fix inflation, a nation’s bank or treasury adjusts the supply of money for a population, at a moderate rate

Powell, in his address of late 2021, said that the Fed would slow down buying Treasury bonds and would enact three interest rate hikes throughout 2022. The reason being that the Fed wants to slow the supply of money to mitigate inflation.

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Reasons for Our Inflation

As previously stated, there are many reasons for our inflation. The main sources of inflation are the pandemic and other natural disasters, supply chain crisis, and policy. The real argument between economists is which source has contributed the most to inflation.

The Pandemic

It’s easy to understand how the pandemic has impacted the economy. Businesses and people had to rapidly adapt to new lifestyles, switch to working from home, conduct less business or be out of work completely. As a result, the economy had to momentarily halt and re-calibrate.

Also, it put considerable strains on supply lines, as the demand for different types of goods and services grew exponentially. Private sectors were having trouble meeting demand, as they also had to adjust to meet pandemic guidelines. New variants keep forcing the economy to start and stop again, as Covid-19 cases rise quickly and are slow to fall back down.

The Supply Chain

When it comes to the supply chain, other natural disasters and mismanagement caused a slowdown in production. Incidents like the Suez Canal being blocked was a severe bottleneck to supply chains, and it took suppliers months to catch up after it was fixed. Severe weather, like harsh winters in Europe and Asia added to an energy crisis, whose trickle down affect we’re seeing today in the price of groceries, tech, and transportation. Even housing prices and rent rose exponentially as people couldn’t afford their homes and property owners couldn’t afford to keep tenants. In short, manufacturers and producers of goods and services were not able to keep up. When there is too much demand, and little supply, prices go up.

The Policy

It’s also important to note that the world economy is also facing an inflation spike. Trade involving exporting and importing goods has become more expensive, driving prices higher. In addition to the Fed’s actions, legislation looking to create domestic manufacturing jobs would help the U.S’ supply chain and strengthen its competitiveness with China. A legislative measure like this would ease demand, helping to lower inflation overall.

Throughout the pandemic, the government provided stimulus checks and Covid relief aid. That aid was a necessity to combat rising unemployment and jump-start a hurting economy; however, as the economy started to re-energize and grow, that aid fueled inflation. It’s unfortunate, as this aid was vital to a lot of people who had lost jobs and homes. Breaking it down economically, when the public received aid, its purchasing power would momentarily increase; but supply was still too low. Prices would fluctuate steadily as more people were willing to spend their aid on goods like food, transportation, and rent. As stimulus slows, and prepares to completely stop later this year, those prices continued to grow even as purchasing power fluctuated.

One of these reasons alone would be enough to create moderate inflation, and no single factor is solely responsible for the current state of the economy. These factors put together are the reason our inflation is the highest it’s been in forty years.

Inflation and Social Security

Social Security gets caught up in inflation’s warpath, just like everything else. Social Security will still be administered on time, and our benefits are even set to see a six percent increase, due to inflation. The concern lies with whether that COLA increase will be enough to cover common costs for seniors like healthcare.

Seniors can increase their benefits by waiting to claim; however, it can be hard to navigate an inflating economy and having extra benefit money in your pocket can be tempting. The way to survive inflation is to be as on top of your personal finances as possible. Organizing and minimizing expenses, utilizing as many income streams as you can, and saving whenever possible are how you and your retirement can weather the inflation storm. If you can’t wait to claim, understand how your Social Security benefits are reduced and taxed, and what other options that provides and takes away from your retirement.

Final Thoughts

With all the news about the economy and inflation, it can be hard to feel hopeful about the future. However, there is always hope. The Fed has dealt with inflation before, and these methods it’s employing are tried and true. Inflation is a natural part of any powerful economy and will level out as we make our way out of the pandemic.

Outside the federal government, the people’s work never stops, as organizations like the Council for Retirement Security are tirelessly working to protect the Social Security Trust. There are many reasons for our inflation, but there will never be an acceptable reason to weaken or disregard Social Security.

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