Maximum since the early 1980s: how the United States came to such inflation

In the recent pre-pandemic years, the problem of high inflation in developed countries seemed outdated. Price growth rates, on the contrary, fell short of the targets of central banks. But “sometimes they come back”: as the world economy deals with the consequences of the corona crisis, it also has to deal with increased inflation.

On the same day – January 12 – the Russian and American statistical agencies summed up what inflation was in 2021. Thus, in Russia over the past year, prices rose by 8.39%, and in the US – by 7%. For the first time in 40 years. However, this indicator is not much that unites the situation in the American economy now and in 1982.

At the same time, the optimal level of inflation for Russia, which the Central Bank is striving for, has been 4% for a long time. But the goal of the American authorities is 2%. That is, if in Russia the rate of price growth exceeded the desired level by a little more than twice, in the United States they did it 3.5 times.

The main contributor to inflation in the United States continues to make rising prices for used cars, clothing, food, and housing. And if the first three categories can still be attributed to temporary – pandemic – factors, then the latter is a more stable component, said Olga Belenkaya, head of the macroeconomic analysis department of FG FINAM.

The surge in inflation that the United States and the global economy faced in 2021 is primarily associated, of course, with the coronacrisis and the reaction of the authorities to it.

The pandemic has closed many industries, disrupted supply chains and created shortages of goods and resources. And this led to an increase in the costs of producers, which they included in prices.

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At the same time, restrictions have locked people at home: demand for services has decreased, while durable goods have increased. Growing – on direct monetary state support – and the income of American households. At the same time, enterprises increase wages to attract employees to fill open vacancies. As a result, in 2021, when this money reached the real sector of the economy, it could not cope with demand. Which naturally leads to higher prices. However, wage growth still does not keep pace with inflation. According to Bloomberg, the inflation-adjusted average hourly wage in December 2021 was down 2.4% from a year ago. At the same time, compared to the previous month, the figure increased.

Against this background, the loose monetary policy of central banks also contributed. In order to support the population and business, global regulators have been reducing key rates throughout 2020. For example, the Russian Central Bank set an all-time low of 4.25%. But in 2021, he began to raise it. But in the US, it has remained about 0%. For which the Fed has been repeatedly criticized already in 2021.

High inflation is becoming a burden on American citizens and hurting the US economy, said US Federal Reserve Chairman Jerome Powell, speaking on January 11 at the Senate Banking Committee. He indicated the readiness of the central bank to act if inflation remains at a high level for longer than expected. He also acknowledged the Fed’s mistake, which for quite a long time interpreted high inflation as a “transient” and temporary phenomenon that did not require policy adjustments. Economists are now criticizing the Fed for being late in its estimates.

To combat inflation, the Fed has two main measures. The first is to cut or roll back the quantitative easing program. The second is to raise the key rate. In this sequence, the American regulator took action. He began winding down economic stimulus last November and is expected to complete this March. In quantitative easing, the central bank buys financial assets to inject a certain amount of money into the economy. Until recently, the Fed spent $120 billion on these purposes every month, but since November it has been reducing this amount by $30 billion every month.

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And now most market participants expect the Fed to raise the rate already at the March 16 meeting. However, the market has already taken this into account in its expectations, Olga Belenkaya noted. Fed members are now suggesting three rate hikes this year. And experts from Goldman Sach, JPMorgan and Deutsche Bank predict four.

The New York Times sees enough reason to believe that the inflation surge will not linger in the country for long. It is likely that companies will be able to gradually establish production and reduce the shortage of goods. In addition, although many households have accumulated quite a lot of savings on government assistance, the authorities are curtailing crisis support. This means that the injection of money into the economy will be reduced.

Also, before the pandemic, the decline in US inflation in recent years was dictated by an aging population and high income inequality. Americans preferred to save rather than spend. These fundamental factors have not changed.

Arina Raksina

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