Why is Inflation still high in the United States? Experts say that there are three major factors pushing the price of goods and services up. These factors are rising wages, higher energy costs, and strong consumer demand. Each one helps push the cost of everyday items higher.
As a result, it will take a lot of effort on the government’s part to put things back to pre-pandemic normal. However, the question remains. Why is inflation still high?
Why Is Inflation Still High? Rising Wages
The pandemic’s Great Resignation forced many businesses to rethink their hiring and retention strategies.
According to Jayson Lusk, Purdue University head of agricultural economics, workers who left their low-paying jobs started the breakaway.
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Now, workers won’t show up if companies insist on still paying pre-pandemic wages. As a result, wages are steadily rising across the US since 2020.
The Bureau of Labor Statistics said that wages climbed by 8.3% between 3Q 2020 and 3Q 2021.
Despite the wage increases, many companies are still waiting for their workers to return to their jobs. However, this isn’t happening in many industries.
As a result, hiring managers are now offering even higher wages and additional perks to entice workers to sign up. “The labor market needs to get sorted out; you need a solution to the Great Resignation problem,” Lusk observed. “There’s no normalcy until that occurs.”
With retailers and manufacturers burdened with higher salaries, they see no reason not to jack up their prices.
Under the aegis of increased wages and more expensive supply chain costs, many have raised prices. Even as many consumers complained about higher costs, most haven’t changed their purchase habits.
Why Is Inflation Still High? Higher Energy Costs
High fuel prices are one major reason that help keep inflation still high. However, gas prices are hovering at an all-time high even before Russia invaded Ukraine.
Oil prices have crept up to $100 levels way before the first Russian tank entered Ukrainian territory. That’s because oil-producing nations restricted their output during the pandemic due to low demand.
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Even as industries started reopening, oil companies hesitate to return to normal production levels. They pointed out that COVID’s uncertainty and tendency to shut down businesses will leave them vulnerable again.
As a result, demand for oil far exceeded supply, which caused prices to shoot up. Add Russia’s military adventure into its neighbor, and oil traders are panicking over a potential shortage.
Now, the average price for a gallon of fuel in the US is way above $4. In contrast, prices of the same gallon of gas were around $2.86 a year ago. Yet, Americans still troop to filling stations to gas up.
At the same time, airlines are reporting insane booking rates as pent-up demand explodes. Never mind the rising costs of jet fuel, travelers want to catch a vacation flight before the borders close again.
Why Is Inflation Still High? Strong Consumer Demand
This last factor is a bit more puzzling for economists. Despite the onset of high inflation, many Americans are still acting like there’s no forthcoming recession in sight.
The US government unleashed a flood of money earlier in the pandemic which gave households a lot of extra money to spend and boost the economy.
However, far too many Americans took the issue to heart, leading manufacturers to increase their output of goods. Despite higher prices later during the pandemic, consumers are still waving their bills.
Even if inflation is still high, many households seem bent on spending money.
“People have money, and they’re wanting to spend it. And despite higher prices, if you ask how people are responding to inflation,” Lusk said. “They’re saying, ‘I’m not really changing, I’m just paying more, not cutting back.’ That suggests they’re not acting like it’s a recessionary environment yet.”
Now, the Federal Reserve is scrambling to cool down an overheated economy. The central bank already raised interest rates by a quarter-point earlier this month.
Now, they’re poised to raise interest rates another half-point by May. They also plan to hike rates six more times this year.
Their idea is to make borrowing more expensive so that households and businesses will rein in their spending.
So, Why Is Inflation Still High?
Given the Fed’s recent actions, why is inflation still high? The Federal Reserve’s solutions will take time to take effect. People are still spending money even as prices continue to rise.
In other words, demand remains high even as supplies are both limited and higher-priced. Fed Chairman Jerome Powell vowed to “moderate demand growth, thereby facilitating continued, sustainable increases in employment and wages.”
Once Americans begin feeling the crunch of higher interest rates, they might ease back on their spending.
At the same time, companies might decide to hold back on their expansion programs and plans to borrow from banks.
Watch the TODAY video discussing “Why Is Inflation So High? “ and other most Googled questions:
What do you think is the biggest factor driving up inflation? Is it rising wages, increased fuel prices, or strong consumer demand? Or, is it something else?
Tell us what you think. Share your thoughts in the comments section below.