Inflation soared 4.2% in the last 12 months according to the latest report from the U.S. Bureau of Labor Statistics. Although the country is still far from entering an inflationary crisis, this latest report is certainly an anomaly for a country accustomed to inflation of less than 2.5% per year. So, in case you were wondering why inflation is rising in the U.S., here is a quick explainer.
1. Global value chains are affected
From Coca-Cola to Ford, every industry in the U.S. is facing some form of shortage that is reflected in the price of raw materials and secondary goods needed to get American manufacturing up and running.
While Coca-Cola contemplates raising prices due to high corn costs caused by growing demand from China and a supply that fails to catch up, Ford decides to cut its production in half for this quarter due to a shortage of microchips essential for the manufacture of automobiles.
Gasoline has also been affected by the rising cost of a barrel of oil, which has been caused by the accumulation of crude oil reserves by OPEC countries. Gasoline prices recently spiked due to a cyber-attack on the Colonial pipeline infrastructure, although this increase did not influence the price increase in April.
Last year’s government-mandated shutdowns also had a massive impact on the production lines of thousands of businesses that have had to pause production repeatedly due to local and border closures.
With the openings, demand has grown, but production lines simply cannot keep up and even have difficulty finding personnel. There is huge congestion of containers to be transported and retailers need more truck drivers to transport the goods. With demand growing and productivity affected by quarantines, suppliers will end up increasing prices.
2. Inflation spiked due to government stimulus plans
With more than $3.3 trillion pumped into the economy last year, plus $1.9 trillion pumped into the economy this year and billions more on account of the Biden administration’s expansion plans, it is possible that this money could overheat the economy in the future.
Due to the $1,400 checks from Biden’s and Congress’ stimulus plans, Americans have achieved savings rates never before seen in the economy. With the end of the shutdowns, much of that money could be channeled into consumption, with supply still weakened by weak retail chains. Indeed, it is natural for the price of goods and services to rise.
3. The Fed’s money issuance
The Federal Reserve (Fed) is possibly the main culprit behind inflation. After the start of the pandemic, the Fed pledged to keep interest rates at virtually zero until it returned to the natural rate of unemployment, i.e. 3%. Today, there are more than 8 million unemployed in the United States.
The Fed’s logic is that keeping interest rates close to zero will make credit cheaper in the economy, and cheaper credit will reactivate demand, which will force supply to expand production and hire more people.
Unfortunately, it seems that while the market has seen demand grow, the same has not been true for the revival of employment. There are currently more than 6 million vacancies that remain unfilled, despite high unemployment rates.
4. The trade war with China
Nearly two-thirds of the products the U.S. imports from China are subject to tariffs — representing $380 billion worth of goods per year. Some of the tariffs have hurt U.S. industrial supply chains, such as the supply of semiconductors, a market in which China is gaining a foothold.
The tariffs have forced many U.S. businesses to diversify where imports come from. While China has lost share in the U.S. trade balance, that share has been replaced by countries such as Vietnam, Malaysia, and Taiwan.
5. The real estate market
Another indicator of inflation is real estate prices, which have reached historic highs due to the increase in home purchases by young people, encouraged by the low-interest rates being offered by banks.
It is not only the real estate market that is showing price inflation but in general all asset markets, such as the stock market, the derivatives market, and the bond market. The growth in the price of stocks, as well as housing and other assets, is a sign of the inflation that is already occurring in the United States as a result of easy money policies.