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Inflation Reaches 39-year High, What to Do

  • Written by Steel Rose

We're seeing the impact of surging inflation, which has reached a 39-year high, on the goods we buy every day. But what's behind this inflation, when will it end and what should you do about it?

Three Wisconsin economic experts have answers to those questions. 

What is inflation and how does it happen?

Inflation is the overall increase in prices

"It's not one price or one small group of prices," said Fox Valley Technical College economics instructor Rick Reid. "And it's not when they kind of blip up or go up and down a little bit. This is a little more sustained."

Some level of inflation — about 2% per year — is normal and essential for a healthy, growing economy, Reid said. 

But inflation in November hit a 39-year high. The consumer price index jumped 6.8% from November 2020 as the country's economy continues to deal with the effects of the COVID-19 pandemic, according to the U.S. Department of Labor

There are two kinds of inflation: cost push and demand pull.

 Cost-push inflation occurs when the cost of production increases, so the cost of the final product becomes more expensive. Demand-pull inflation happens when the demand for goods or services is higher than the production capacity. 

"What's unique about right now is that we seem to have both of them going on at the same time," Reid said. 

What goods are most impacted right now?

Most Wisconsinites are probably feeling the impact of inflation in their everyday lives at the grocery stores and gas pumps. 

As of November, prices had risen 6.4% annually for groceries, according to the Labor Department. Meats saw some of the biggest jumps, with annual increases of 16.8% for pork, 13.9% for beef, 8.4% for chicken and 8% for fish. 

Gas prices soared 58% over the past year, rising 6.1% monthly in November, according to the Labor Department. The rising price of gas and oil not only impacts how much it costs to fill up your personal vehicles, but also increases the cost of airfare and shipping goods. 

Used car and truck prices are up 31.4% from a year ago and new vehicles are 11% more expensive as the car industry continues to struggle with a microchip shortage that is impacting carmakers' ability to deliver new vehicles. 

The cost of housing continues to increase as well. In Wisconsin, the median home price is up 7.6% from November 2020, according to the Wisconsin Realtor's Association. 

Natural gas is up about 25% over the last year, and electricity costs are 5% higher.

Although wages are also climbing as a result of the worker shortages, they’re not keeping pace with inflation. 

How did we get here?

The current increase in the inflation rate is closely tied to impacts from the COVID-19 pandemic, including a nationwide labor shortage and supply chain constraints. 

At the beginning of the pandemic, the rate of inflation was almost zero and prices were falling, said Dr. Menzie Chinn, an economics professor at the UW-Madison La Follette School of Public Affairs.

In response, the government passed robust support packages — including stimulus checks, enhances unemployment benefits and tax cuts — to boost spending. The spending those programs created was concentrated more on goods than services, Chinn said. 

"We have kind of a weird time where people have shifted more towards buying goods and we get a lot of our goods from China and abroad," Chinn said. "So that means you have this collision, at least in the goods sector, of enhanced demand and not quite enough supply to keep up. And what happens is prices go up. Supply and demand."

 

The measures put in place by the government to help people worked as they were supposed to, Chinn said. But, the pandemic also exacerbated a long-developing worker shortage, driven by years of declining birth rates and increasing retirements. Other people left the workforce for reasons directly related to the pandemic — to care for children or sick relatives, out of fear of catching the virus or to reassess their work lives.

According to the Pew Research Center, 76 million Baby Boomers were born between 1946 and 1964, while only 62 million Millennials were born between 1981 and 1996.

The pandemic sped up the decision to retire for many Boomers. As Boomers continue to retire, there simply are not enough people in the younger generations to take their place in the workforce.

In 2020, there were 3.6 million babies born in the United States, down 4% from 2019, according to the Centers for Disease Control. That's the fewest babies born in the country since 1979.

c also created worldwide supply chain and shipping disruptions. Ships carrying goods from abroad to the U.S. are backlogged at ports as trucking companies struggle to find drivers to move products across the country. 

"What that has done is it's put upward pressure overall and particularly in goods and that's where the supply chain issue comes in," Chinn said. "It's not like the ports suddenly lost the ability to bring in lots of stuff. It's the ports and the truckers have a hard time keeping up with the higher level of goods that are being demanded."

The transportation industry has been hit particularly hard by the workforce shortage, said Angela Winker, the lead instructor of supply chain management at Northeast Wisconsin Technical College. The United States is short 60,000 truck drivers, she said. 

What can the government do to stop this?

To combat rising inflation, the Federal Reserve can raise interest rates. 

Earlier this month, the Fed agreed to accelerate the phaseout of its bond-buying stimulus, putting it in a position to start raising interest rates earlier and faster than it had initially projected, USA TODAY reported. The Fed expects three interest rate hikes in 2022 and 2023 and two in 2024, which would push the rate up to 2.1% by the end of 2024. 

But how does this put the brakes on inflation? 

The federal rate is now near zero, essentially unchanged since the start of the pandemic. 

Higher interest rates make it more costly for individuals and companies to borrow money. For example, a business might decide not to expand and build a new factory, therefore not increasing the demand on building materials. If mortgage rates rise, fewer people may want to buy homes. Banks can also raise the interest rate for other sorts of borrowing, like car loans. 

"That's going to diminish people's ability to buy things," Chinn said. "Those things are taking away from the total amount of demand, so then you're taking away that upward pressure on prices."

When can people expect prices to go down?

Since the wave of inflation is tied to the pandemic, inflation likely won't be under control until the virus is. 

Winker foresees the inflation rate returning to normal once labor shortages decrease, fuel prices go down, ports are no longer as congested and other pandemic impacts wane.

If you want to get inflation under control, it really means getting the virus and the spread of the pandemic under control, because that's really at the root cause of these things," Reid said. 

Optimistic projections look for inflation to begin to subside in 2022. However, Winkler believes it is more likely that prices won't start leveling off until 2024. 

That wouldn't surprise Reid either, he said. 

"The longer the pandemic goes on, the more of those variants we're going to see and the most risk we're going to have to more supply disruptions and that's going to impact our pocketbooks," Reid said.

What can I do about this?

It seems like high inflation rates are going to stick around for a while, so Reid suggests people "plan, not panic" and consider a few key areas:

  • Energy: Wisconsinites will more acutely feel the impacts of rising gas and electric costs this winter. To help offset some of those costs, ask your utility company about options for budget billing, consider turning your thermostat down a couple degrees and make sure your furnace has been recently inspected and cleaned. 
  • Housing: If you're coming to the end of your rental lease, consider what other options are available before re-signing the lease with a rent hike. If you're looking to move into a new apartment or buy a house, plan ahead and think about whether this is the right time to move.
  • Transportation: Keep up with your vehicle maintenance and plan for emergencies, such as if your car breaks down or there's an accident. Gas prices are an area to watch as well. Try to fill your tank when you notice a dip in prices, if possible.   

If you have extra income, now is a good time to pay down debts, Reid and Winkler said, especially balances on variable-rate credit cards, as those interest rates will be among the first to go up, making your debt more expensive. To read more click here.