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Here’s Reasone why a return to ‘normal’ prices is a long way off

Thursday, the Bureau of Labor Statistics reported that the Consumer Price Index reached 3.2% in July, up from 3% in June.

Again, food prices were among the largest contributors to the increase last month. Over the past year, the price of food consumed at home increased by 3.6%, while the price of food consumed away from home, such as in restaurants, increased by 7.1%.

Read also: The Effect Of A Shrinking Pharmaceutical Budget On Doximity

The cost of shelter increased by 7.7% annually, while transportation services, such as airfare, rose by 9%.

How did everything become so expensive, and will costs ever decrease?

The positive news is that price increases have already decelerated since their peak in the summer of last year. At one point, the annual rate of inflation reached 9.1%, the greatest level since the early 1980s.

The Bureau of Labor Statistics will release July inflation data on Thursday morning. Similar to June, economic experts anticipate a year-over-year increase of approximately 3%.

However, prices for a variety of products and services have risen steadily during the pandemic years. The evidence was readily apparent in the prices of eggs, ground beef, petroleum, used automobiles, electricity, and rent.

Even though the prices of some products and services have begun to fall from their post-pandemic highs, the United States is unlikely to return to pre-pandemic price levels, or what some may consider “normal” prices, any time soon.

Mike Pugliese, director and senior economist at Wells Fargo, remarked, “It’s been a very long journey from the peak inflation rates of a year ago.” “Absolute deflation is unlikely unless we experience a very severe recession,” he added.

This deflation that Pugliese mentioned — a decrease in prices and an increase in consumer purchasing power — may appear positive, but it can have a negative effect on the economy. People tend to delay purchases in the hopes of obtaining items at an even lower price in the future. In such a scenario, however, companies often struggle with the decline in sales, and as a result, workers may lose their employment.

How did we arrive?

At the onset of the inflationary surge, economists outlined the risks: The combined effects of the Covid-19 pandemic and the war in Ukraine disrupted supply chains, reducing businesses’ ability to deliver products on time and in sufficient quantities; consequently, prices for many items rose.

Later, it became apparent that the impact of pandemic-related fiscal stimulus payments, pent-up spending, and low interest rates had unleashed a wave of demand for products and services that also exerted upward price pressure.

The cost of labor has increased as a result of a worker shortage caused by Covid effects that led to direct long-term illnesses among employees, departures from the labor force to care for loved ones, and outright retirements.

Indeed, the current proportion of the population participating in the labor force is lower than it was prior to the pandemic, which has continued to increase the cost of hiring employees.

ZipRecruiter’s chief economist, Julia Pollak, stated that there are still a significant number of open positions.

This has resulted in unexpectedly robust economic growth and consequently inflation. When households can depend on consistent income, Pollak explains, “they are content to continue spending, buy clothes, book flights, and dine out.”

Expecting consumers to continue spending gives businesses permission to continue increasing prices. Or, as Wells Fargo’s Pugliese puts it, “It’s a little bit circular.”

What steps can be taken to break the cycle?

The Federal Reserve, the central bank of the United States, hopes that by increasing interest rates, businesses and consumers will capitulate and reduce their expenditures.

Officials of the Federal Reserve and other economists have recently indicated that a reduction in interest rates this year is unlikely and that, if anything, additional rate increases may be required.

Remember that current interest rates are the highest they’ve been in twenty years.

“We should remain willing to raise the federal funds rate at a future meeting if incoming data indicate that inflationary progress has stalled,” said Federal Reserve Governor Michelle Bowman earlier this week.

“A more inflationary economy could end up necessitating higher real and nominal policy rates,” Citibank economists wrote in a client note this week.

However, as a consequence of the initial surge of federal stimulus and ultra-low interest rates in the early months of the pandemic, the economy has become much less sensitive to interest rate increases, according to Jeremy Schwartz, an economist with the financial services firm Nomura.

Compare this to the global financial crisis, when products like adjustable-rate mortgages were more prevalent and the financial security of many households was significantly lower.

“Households and businesses have proven to be resilient,” stated Schwartz.

Unemployment is a guaranteed remedy for all of this: Fewer earners mean less expenditure, which reduces price inflationary pressure.

Andrew Patterson, the senior international economist at Vanguard financial services group, estimates that the unemployment rate may need to increase by one full percentage point — from its present level of 3.5% to 4.5% — in order to reach the desired level.

Patterson said, “It’s not something we’re hoping for.” However, we must observe the labor market softening.



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