We’ve all felt it – the heavy weight of paying more for necessities like groceries and fuel. Inflation is a term with a relatively simple definition, but it is far from easy to deal with.
First, what is inflation?
Sir Thomas Tunstall of the UTSA Institute for Economic Development says, “the short answer is rising prices.”
“It’s not a month-long price hike, it’s a continuous price increase,” said David Macpherson, an economics professor at Trinity University.
According to the consumer price index, breakfast products such as breakfast cereals have increased by 13% compared to last year. Eggs are up almost 11%. Gas consumption had increased by 50% by mid-summer.
So what brought us here?
The answer lies in a time we will not soon forget: the COVID-19 pandemic. On March 13, 2020, a state of emergency was declared nationwide at the state and city levels. On March 23, 2020, the City of San Antonio enforced a stay-at-home order.
With everyone sitting at home, cash flow across the country was very low. The federal government intervened to try to solve the spending slump with stimulus measures.
The first incentive check came out in March 2020, worth $1,200. The second was issued in December 2020, worth $600. These checks helped some people cover lost wages and pay for things they couldn’t otherwise. The last check came in March 2021 for $1,400. “The stimulus package that came out of the $1.9 trillion passed by Congress was too big. And how it was actually paid for was by printing money,” Macpherson says. He says, “The problem was that we were short of economic output. By the time they were over, the $1.9 trillion was about half a trillion. So we’re half a trillion short. But then you spend $1.9 trillion. That’s too much spending.”
Think of the economy as a giant aquarium. The water represents money flowing within the economy. During the pandemic, the water level became too low because no one spent any money. The government added more by sending out checks. But if you add too much water to an aquarium, it will overflow. “If you print too much money, you get inflation,” Macpherson said.
Cash flow is only part of the equation. Goods and services also did not flow through the pandemic. Shipping ports around the world were backed up for months, leading to a delay in reaching shelves.
“A lot of it is supply chain related. The fact that the ports of ports, especially the ports of Los Angeles and Long Beach, where most containers enter the US, 40% of the goods imported by the US enter through those two ports. And with COVID, they struggled to maintain staffing levels and keep the flow of goods flowing,” Tunstall said.
In addition, the US struggled to get computer chips for cars and computers. In general, there was more money in the economy than items to spend it on. It led to price increases on the things that were available.
War in Ukraine
Then came the war in Ukraine. Russia invaded Ukraine in February 2022. That put pressure on global oil markets as countries tried to hit Russia where it hurt. Tunstall said: “Because of US sanctions, or I should say more generally, NATO sanctions, that, you know, there is a desire to punish the Russians for their invasion of Ukraine, it is not clear how effective some of those sanctions are.”
The consumer price index
All of these factors combined have led to the 8.5% inflation America faces today, according to the Consumer Price Index (CPI).
The CPI is a record maintained by the Bureau of Labor Statistics to show how the prices of items change from month to month.
“Crude oil or crude steel or commercial real estate, none of those things are in the CPI, but gasoline, bananas, your rent you pay — all those things are,” said Steve Reed, an economist for the Consumer Price Index. Each month, the CPI looks at 60,000 to 80,000 prices for a range of items from 75 locations across the country.
“That gives us this big pile of prizes. And then we take that big pile of prices and compare it a little bit with the previous pile of prices and see how much they’ve gone up,” Reed said.
The CPI reports that in July 2020, Americans paid an average of $3.25 for a gallon of whole milk. A year later, that price stood at $3.63. Today the average is $4.15.
Find prices of articles in the Consumer Price Index by clicking here clutch.
The CPI isn’t just used to help you understand what costs more. It also helps companies make decisions.
“Maybe landlords use it to raise their rent or bosses who use it to give their employees raises or people in finance who are interested in what’s happening with inflation,” Reed says.
Social Security recipients also receive an annual cost of living adjustment based on the CPI.
the Federal Reserve
The current inflation rate of 8.5% is the highest America has seen in 40 years. The Federal Reserve has taken steps to solve this problem by raising interest rates.
The Fed has raised interest rates twice this year, resulting in the current range of 2.25% to 2.5% interest rates. Their goal is to discourage people from borrowing and spending money.
“The belief is that the economy is getting too hot, that there is too much demand and that we need to suppress that demand a bit. And rising interest rates will,” Tunstall said.
However, it may take some time to see the progress.
“It’s not like immediately when the Federal Reserve raises interest rates — immediately the economy slows down. It’s like driving a supertanker, isn’t it? It takes time to make a left or right turn,” said Macpherson.
A question on the mind of many people is, “Could we see a recession soon?”
“The track record of trying to avoid recessions by the Federal Reserve when they try to reduce inflation is not good,” Macpherson said. “A so-called soft landing where you reduce inflation without triggering a recession is a rare occurrence. It’s often a hard landing where you get a recession, so there’s a good chance we’ll end up in a recession soon.”
San Antonio may have something to its advantage to avoid the dire effects of a recession, and that is a strong local economy.
Economists say the city’s current economy isn’t what it used to be.
“San Antonio, its economy is much more than Military City USA or, you know, a hub for tourist destinations,” Tunstall said. “It’s much more than that now, because there’s aerospace, healthcare, medical care, a whole bunch of financial services, a whole bunch of other industries that buffer the economy, can buffer the economy somewhat in a recession.”
Click here to watch more episodes of KSAT Explains
Copyright 2022 by KSAT – All rights reserved.