Inflation has been making headlines worldwide. In the U.S., inflation reached its highest rate in 40 years, at about 7.5% in January 2022. Because of the consistent supply shortages and the rising demands, consumers are seeing sharp price increases for various products and services including food, housing, medical care and utilities. When inflation becomes prevalent throughout an economy, it raises concerns for both consumers and businesses.
Inflation rises due to the existing economic circumstances. For example, gas prices go up when there is limited oil production. Clogged supply chains lead to delays and shortages of goods, resulting in prices going up.
We can’t ignore the fact that the current inflation is an aftereffect of the pandemic. In 2020, factories had to shut down, hindering shipping routes and affecting the world’s supply chain. Consumers lived with empty shelves and rising prices, with specific shortages for masks, toilet paper and sanitizers.
The pandemic also devastated the tourism industry. According to the United Nations World Tourism Organization, 2020’s decline in international travel caused an estimated loss of $1.3 trillion in global export revenues.
During these times consumers accumulated a significant amount of savings. Part of the savings came from not needing to drive to work or travel domestically or internationally. We also shouldn’t forget that those consumers received a few stimulus checks from the federal government. When the pandemic restrictions began to ease, consumers ramped up spending on furniture, computers and appliances. After a period of time, their increased demand drove up the inflation rate. Despite the rising costs, consumers continued to shop and buy products, probably causing the rapid price increases.
According to the United States Bureau of Labor Statistics, the Consumer Price Index (CPI) increased 6.8% from November 2020 to November 2021—the largest CPI increase since 1982. Compared to 2020, food prices increased by 6.1%, while energy prices rose by 33.3%. These rapid increases tempt some economists to call the current situation hyperinflation, rather than inflation, which can be harmful to middle-class workers and small and mid-sized businesses.
Economists initially predicted that U.S. inflation would begin to fade at the end of 2022. However, Federal Reserve Chairman Jerome Powell has doubts about that. According to Powell, we cannot be certain because inflation has been more persistent and higher than previously expected.
I don’t believe there will be any signs of inflation mitigation—or price stability—this year until the Federal Reserve consistently raises the interest rates. This will discourage borrowing, which tends to slow down the economy, and thus reduce inflation. History tells us this is the most effective method of counteracting hyperinflation.
Until this happens, we need to reevaluate how we spend our money. As students, we should expect that our personal expenses will increase, from tuition fees to buying a cup of coffee. To survive this hyperinflation, we need to figure out ways to spend money on less things than we normally do. One person might want to cook at home more often. Another person might find ways to reduce transportation expenses. A different person might want to buy a used car instead of a new one. For people with cash savings, it would be prudent to convert cash to commodities like gold. As it is known, gold tends to be more stable than fiat currency over time.
In short, during this period of inflation, we need to track our expenses and budget more carefully. This will help us understand our spending habits and categorize wants and needs. Doing so will also help us spend our money more wisely so we can get through this period of inflation with minimal losses.