Why Is Inflation So High? Plus How Your Wallet Can Survive

In the past few months, Americans have seen a sharp increase in the price of many essential goods and services. With salaries staying the same, this inflationary trend has frustrated many people, leaving them concerned about the future.

The latest consumer price index (CPI) reports a 7.7% increase in inflation over the last year (a 40-year high). This inflation data shows that the average American family spends more each month to cover basic living expenses.

Which begs the question – why is inflation so high?

While there is no single factor that can fully explain this trend, there are a few key drivers that have contributed. Here are some of the culprits.

Too Much Money in The System

The COVID-19 pandemic necessitated a prolonged lockdown, keeping people inside their homes and businesses closed. While this helped curb the spread of the virus, it led to an overabundance of funds in the system.

People spent less, but cash was in surplus, driving inflation. America’s economic stimulus package was an additional influx of funds into the economy, further contributing to inflation. According to the Federal Reserve, Americans had extra savings of $2.3 trillion from 2020 to mid-2021 – that’s a lot.

All these got reinforced by shortages of everything from food to other household items, so people had less to buy. In the end, people started spending on whatever was left and, by so doing, bumping up the prices of these items.

Supply and Demand Imbalances

When there is more demand for a good than available supply, the price goes up. People are willing to pay more for goods when they are insufficient, racking up inflation figures.

At the height of the pandemic, when spending dropped and savings increased, the demand for goods and services decreased. But now that we have emerged from this crisis, people are more willing to spend, increasing demand.

The problem is businesses needed to increase supply faster to keep pace with the increased demand. Delayed shipping, staff shortages, etc., all contributed to this problem.

Supply Chain Disruption

Supply chain issues often have a devastating effect on the prices of goods. Without critical inputs, businesses cannot run optimally, causing a supply shortage.

On the back of the pandemic, several businesses in the US have experienced supply chain disruptions, including driver shortages, logistics provider capacity issues, shipping delays, increased freight costs, labor shortages, etc. All these issues have had a significant impact on the prices of goods.

To combat some of these issues and keep prices down, the Bureau of Labor Statistics (BLS) reports a 1.2% wages and salary increase to incentivize employees and higher starting pay for new workers. While this move might help, many businesses still struggle with supply chain issues, and it will take time to resolve them.

The War in Ukraine

Russia’s invasion of Ukraine has significantly impacted global commodity prices, driving inflation. The ongoing war has resulted in decreased supplies of oil and gas, food, and metals, pushing up the costs of these commodities.

Sanctions from several European states and the US have yet to help this situation. Although these sanctions were supposed to punish Russian aggression, they have also severely hurt the rest of the world.

In response to the sanctions, Russia has continued to decrease its exports of these essential commodities, further driving up the prices. As winter looms, this could spell more trouble for countries heavily dependent countries on Russian gas.

Rising Energy Prices

Every company needs energy to power its operations. Therefore, rising energy costs are bound to affect food prices and other essential commodities.

The sanctions on Russia have led to less oil and gas supply for the rest of the world, causing a direct impact on other goods and services. Production, shipping, and transport costs have all gone up as energy prices have increased.

Joe Biden’s total ban on Russian oil and energy imports back on March 8, 2022, also impacted oil prices. In response, companies increased their selling prices to keep up with production costs.

Reduced Interest Rate

The Federal Reserve reduced interest rates in the wake of the pandemic to help people access credit at more affordable rates. This move helped US households receive funds but contributed to prevailing inflation.

With limited spending opportunities and everyone indoors, more people held onto their money. Juxtapose this with the government’s relief fund, and you have the perfect storm for higher inflation.

Although the Fed has been slightly increasing interest rates in recent months, the target 2% annual inflation rate is still far out of reach.

Higher Wages

Labor demand since the pandemic has gone up because consumer spending has increased. The excess demand stems from the tons of cash in household bank accounts and a supply deficit from shortages of workers and goods.

Many businesses have increased starting wages and compensation to fill vacant positions and encourage workers to stay. BLS says compensation for workers has grown by 5% over the last year. That is only modestly effective in curbing inflation. Why?

When businesses raise wages, they inevitably have to raise prices to remain financially viable. And as prices go up, people demand a pay raise to account for the higher costs, creating a vicious inflation cycle.

What Are The Feds Doing About The High Inflation?

The Federal Reserve (like other central banks) helps to ensure a stable and robust economy by promoting conditions that foster sustainable economic growth while maintaining financial stability. The Fed has played its best move – increasing interest rates in response to inflation.

Over the last few months, the Fed has increased interest rates a few times to reduce inflation numbers. This stop-gap measure may take several months or years to achieve price stability. Yet they must be careful with these changes because a misstep could lead to a recession.

The last rate increase was in early November, bringing the policy rate to 3.75%- 4% – the highest since December 2007. The implication is that borrowing will become more costly, reducing the number of people with access to credit. The goal is to slow down the spending rate and, eventually, inflation.

Also, with fewer buyers, sellers will be forced to lower their prices to retain customers. Over time (nobody knows how long), this may slow down the rising costs and inflation rate.

How Can You Survive High Inflation

If there’s anything we’ve learned due to inflation, it’s to be resilient and flexible in adapting to changing financial conditions.

The effects of inflation are far-reaching, affecting your finances and quality of life. To help you navigate the changing economic landscape, here are some tips on how to survive high inflation:

Build an Emergency Fund

A large cushion in your savings account will help you weather any economic shock. Work to increase your emergency fund to cover at least six months of expenditure so that you can maintain your standard of living and pay for unexpected costs.

Save More

The best way to protect yourself from inflation is to save more; it means setting aside a percentage of your income for some return on investment. But you must be strategic. For example, there may be better options than putting money in a traditional savings account since interest rates are low, and they might need to catch up with the inflation rate. Instead, consider investing in stocks or high-yield accounts that offer better returns to your funds.

Re-evaluate Spending Habits

Now is the time to take a step back and evaluate your current spending habits. Are you overspending? Consider lowering your overhead by cutting back on things like eating out at restaurants, subscription services, gym memberships, etc.

Focus on the essentials – your utilities, rent or mortgage, food, and transportation – and find ways to spend less on other things. With these simple changes, you’d be amazed at how much you can save in the long run.

Look For Additional Sources of Income

If you’re struggling to make ends meet, consider taking on a part-time job or freelance. This gig could be anything from working as a tutor or dog walker to driving for ride-sharing services.

The extra income can help cover your cost of living and afford you the life you’ve always wanted. It can also give you a sense of financial security and independence, which is vital in these uncertain times.

Become a Bargain Hunter

These times call for creativity and resourcefulness to stay afloat. In other words, be more conscious of the price of goods and how you spend. This period is the perfect opportunity to research and compare prices, find coupons, and hunt for sales and discounts.

Use apps and credit cards, get deals on coupon sites, take advantage of seasonal sales, and buy bulk to help reduce costs as much as possible.

Brace Yourself for The Long Haul

It has been well over a year since inflation rates began to surge, and the effects of the Fed’s policy changes will take some time to kick in. As a result, you may have to brace yourself for the long haul and make financial changes.

Despite the current inflation rate and rising prices, you can still survive and thrive in this uncertain economic climate. You can weather the storm and emerge stronger by being flexible, proactive, and strategic with your money.

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