Why High Inflation Will Last Longer than the Fed Thinks

• Author: Mary Singleton
• Posted: 2024-10-18

If you have bought anything in the last year, you have undoubtedly realized that prices have gone up in a hurry. Inflation has reared its ugly head, and it is costing American families more every time they go to a grocery store or fill up their gas tank. There are different opinions about when this inflation spike will subside. In the meantime, you can expect continued price hikes to eat at your paycheck into early 2022.

Higher Savings and Supply Shortages Raise Prices

This current bout of inflation has resulted from a near perfect storm of factors. First, Americans had saved far more than expected during the pandemic. Between government financial support and saving money by staying at home, people had grown their own bankrolls. They were simply just waiting for the time when they had the ability to spend it.

Next, there have been shortages throughout the supply chain. Companies shut down production at the start of the pandemic, and it has taken some time for them to ramp production back up to pre-pandemic levels. Complicating this is the fact that companies cannot hire enough workers to complete the task. They are also facing shortages in the raw materials needed to make their product. The combination of more money saved and ready to spend along with fewer goods available to purchase have turbocharged inflation. Consumer inflation metrics have surged to levels not seen since the 1990s.

The key question is when prices will level off and be more stable. For now, experts believe that this bump in inflation is temporary, and we are not returning to the high inflation environment of the 1970s and early 1980s. For example, Chicago Fed President Charles Evans sees inflation dipping back below the Fed's target of 2% when the current spike subsides. However, that endpoint has not yet been reached.

The Tight Labor Force Is Causing High Prices

Many are not as optimistic as the Fed when they assess inflation. Structurally, the economy has changed because of the pandemic. The two largest components of prices are raw materials and labor. Both are in very short supply. For example, the chip shortage that has plagued the economy for the entire 2021 is not forecast to alleviate until the end of 2022.

In addition, the workforce has been permanently changed. Many workers have left the workforce or have changed professions as a result of the dislocations caused by the pandemic. Further, several hundred thousand workers have died from COVID-19, leading to a dip in the supply of available workers. Job listing for now far outpace the number of people looking for jobs. Employers are bidding against each other for people to hire, competing to offer the best incentives to prospective employees. Many of these costs will end up being passed along to the consumer. Until the workforce returns to more of an equilibrium, price increases will continue to happen.

Consumers' pile of money is still sitting on the sidelines as the Delta variant is still surging. While people began to travel this summer, many have put their plans on hold. Americans will not leave this money in their pocket for too long. As Delta subsides, you can count on people being out there spending money as life returns to normal. The Fed has telegraphed that it will not touch interest rates until the end of 2022. This leaves more than a year for the economy to continue overheating.

The Government May Actually Want More Inflation

Finally, the levels of government debt have reached a tipping point where they will be inflationary. The government actually has an interest in letting inflation run hotter than usual because it will devalue their debt. The pandemic rescue packages have come at a steep cost, and the total national debt has blown past $30 trillion. If inflation is too low, this will cause a debt crush for the federal government.

Where this leaves you is struggling with decisions whether to pay the high sticker prices that you see right now for major purchases. Likely, the answer to that is yes because it will not get any better in the future. The inflation that you see right now will last longer than the Fed or any other expert thinks. This will keep hitting you in the wallet if your paycheck does not keep pace.