One does not have to be a renowned economist to show that the U.S is in the middle of having a ridiculously high inflation rate. For example, in 2020, $8.70 was more than enough for us to get a chicken burrito bowl at Chipotle. In 2022, not even a $10 bill would get us the same reward. Not even within two years, the overall menu price at Chipotle has increased by more than 10% (Beckett 2022). Unfortunately, this phenomenon is not happening to just Chipotle itself– it’s not that but at a larger scale. Since the beginning of 2021, the U.S economy has been in danger. Coming off a rough year as COVID-19 disabled countless businesses, the U.S economy was in pursuit of returning the world back to normal life. Yet, frequent political clashes, government measures, and complications in the global supply chain posed more concern than relief for the economy. As of December of 2021, the inflation rate has reached 7.1%– the highest annual pace recorded in four decades (Holland 2022). With these skyrocketing statistics, the economy would get worse if no proper actions are taken. While U.S inflation will continue to remain at a high level, I predict that it will eventually reach the average rate with the aid of the Fed and people’s actions. 

To comprehend the current situation better, reviewing fundamental economic terms is necessary. Inflation refers to the loss in buying power with the rise of prices for goods and services over a period of a year. The consumer price index (CPI) is used to gauge the level of inflation by measuring and comparing monthly daily living expenses (Little 2022). 

Inflation is classified into three major types: Demand-pull, cost-push, and built-in. 

Demand-pull inflation occurs when the money supply increases. With more money available, consumers are prone to purchase more goods and services, leading to higher demand and higher prices. On the other hand, cost-push inflation is the result of an increase in the prices of production process inputs. Because it takes more money for businesses to manufacture the product, it would naturally result in higher prices for the finished product. Lastly, there is built-in inflation where its future solely lies in people’s expectations regarding inflation. As the price of goods and services escalates, workers would expect the price to rise continuously and demand more wages to keep the standard of living (Fernando 2022). 

For this recent inflation, it is an ideal representation of all three types of inflation combined. As the pandemic paralyzed the economy, businesses closed or cut hours, people stayed home, and over 22 million people lost jobs (Wiseman 2022). As a result, companies cut investment and delayed restocking, ensuing in the recession. Yet, the economy staged an unexpectedly rousing recovery, fueled by government aid funds and emergency intervention. By spring of 2021, widely available vaccines encouraged consumers to return back to restaurants, shops, and airports– finally enabling economic activity. This put a huge strain on businesses as they didn't have enough workers or enough supplies to meet the demand. As more businesses “soared back”, ports and airports could not handle the traffic, leading to a global supply chain complication. With endless demands and low supply, production costs rose, which led to higher prices for products (Wiseman 2022). With the recent surge of Omicron, a large number of workers are in the absence and in quarantine– the supply chain is still yet to reach its normality (Little 2022). Even with the boosted wages, this is not enough to compensate for the higher prices. Accounting for inflation, hourly earnings for private-sector workers fell by 1.7%, demonstrating how the economy is worsening (Wiseman 2022). I predict the supply chain will take a while to alleviate given that there is still a large volume of positive-tested patients who are not eligible to work. The future of the supply chain will depend on how responsibly each individual responds to the pandemic by strictly following cautionary measures, which could lead to enhancement in the economy. 

While there are solutions available to alleviate the current disaster, it is easier said than done. Matter of fact, if this situation were to continue, prices would continue to rise and the expansion phase would sustain until hyperinflation is achieved, “significantly reducing the real value of every dollar in [one’s] pocket” (Hauk 2021). Steve Forbes, the CEO of Forbes LLC warns about possible cases of hyperinflation. In this Youtube corner, “What’s Ahead”, he comments that undermining the value of the dollar is the biggest issue to be resolved (Forbes 2022). Currently, the Fed has been buying off government bonds to alleviate inflation. Yet, if the Fed were to stop functioning as a big buyer, higher interest rates would ultimately deteriorate the economy and stocks. 

Besides monetary policies imposed within the nation, foreign relations heavily influence the status of the nation’s economic status. And unfortunately, the Russia-Ukraine war is expected to drive the current inflation longer. With Russia’s invasion of Ukraine, Federal Reserve Chair Jerome Powell said, the future of the American economy remains “highly uncertain” (Barrabi 2022). Leading up to the invasion, many analysts have predicted that Russia’s invasion would further disrupt the global energy market. Perhaps the most tangible economic impact of this war is the price of oil. Russia is a major supplier of oil, metals, and agricultural produce across the globe. While Western Europe is seemingly the most reliant on Russian oil, the entire world to some degree will feel the impact of pricing changes. The price of oil has already risen to its highest level since 2014 since the first signs of Russian aggression, and consumers have certainly felt this impact at the gas pumps (Disavino 2022). Another potential consequence of the war is additional supply chain bottlenecks. Overall, this war has already caused commodity pricing distortions, which certainly increase inflation in the short term. Long term, the impact on inflation is more up in the air; the short-term issues could be transitory and dissipate as the fighting is resolved, or they could become even more profound. Global trade fragmentation and other issues could persist from the Russian crisis, leading to higher prices across the board, not just with commodities. While the future remains uncertain in response to the war, the Fed did acknowledge there will be continuous complications in the global supply chain. With the majority of the countries’ futures on the line, the world must come together to stop the aggression and save both the citizens and the economy. 

Despite the dark news, economists envisage the future of America to steadily improve. 

First, the supply chain is expected to become more orderly. While our economy has been in a slump since quarantine, we must understand the economy is a cycle; followed by ridiculous inflation, there must be recessionary measures that would turn the table– stabilizing the economy back to normal. Moreover, it is unlikely for another lockdown to occur. Although the recent Omicron variant is highly contagious, it’s been confirmed to show less severe symptoms and faster recovery rates than its previous variants, allowing workers to return to normal life more comfortably. Lastly, the Fed has been hitting the monetary policy brakes. As Biden’s $1.9 trillion COVID relief package resulted in too much money in the economy, the government has its eyes on reducing the money in circulation by boosting interest rates. Also, we must acknowledge that the past year’s surge in headline inflation came from the “base effect”. Because this “base effect” calculated year over year change in prices with the point of comparison in 2020, it made the 2021 inflation appear larger than its normal scale.

While some degree of natural correction is likely, some have called for the Federal Reserve to step in and take assertive action to address the raging inflation. The Fed is expected to raise interest rates, which have been near zero for the past two years, in the coming weeks. Jerome Powell and the Fed are expected to increase the rate by one-quarter of one percent (Horsley 2022). Despite various predictions for the future U.S economy, long-term clarity about interest rates remains ambiguous as questions still remain about Russia’s aggressive foreign policy, and the impact that it will have on the global market. Regardless, the Fed has made it clear that they are willing to finally raise rates, which is the most viable stance the government can take to protect the economy from falling apart. 

One popular concern with contractionary monetary policy is that it will trigger a recession. In the post-World War II era, recessions have occurred in the past 60%, or 9 out of the past 15, instances in which the Fed has hiked interest rates. In the instances of recession, economic impacts have not been immediate though. The 9 hiking cycles that did lead to recession took 30 months from the first hike to the onset of the recession, with the S&P peaking six months before that (Kasriel 2022). Applying this trend to the current moment would suggest that a recession could occur in late 2024, and the equity market would peak in early 2024. This implies no pressing threat to the economy, as significant gains in the equity market will likely occur before any possibility of a recession. Given this statement, current inflation requires careful attention, yet it’s not the end of the world. Because humanity has the historical data to predict the possible upcoming recession or any type of economical crisis, the Fed should come up with appropriate monetary and fiscal policies ahead of time to keep the nation’s economy in balance. 

Evaluating everything said above, it is extremely hard to predict what exactly would happen in the near future. Yet, knowing that our economy functions just like a cycle, we must remain patient, wait for the economy to settle down, and look for a brighter future. 

References 

Barrabi, Thomas. “Russia-Ukraine War Could Push Us Inflation Even Higher, Fed's Powell Warns.” New York Post, New York Post, 3 Mar. 2022,   https://nypost.com/2022/03/03/russia-ukraine-war-could-push-us-inflation-even-higher-powell/.

Beckett, Emma Liem. “Chipotle's Menu Prices Are about 10% Higher than Last Year, and Still Climbing.” Restaurant Dive, 9 Feb. 2022, https://www.restaurantdive.com/news/chipotles-menu-prices-are-about-10-higher-than-last-year-and-still-climb/618560/.

DeSilver, Drew. “Inflation Has Risen around the World, but the U.S. Has Seen One of the Biggest Increases.” Pew Research Center, Pew Research Center, 24 Nov. 2021, https://www.pewresearch.org/fact-tank/2021/11/24/inflation-has-risen-around-the-world-but-the-u-s-has-seen-one-of-the-biggest-increases/.

Fernando, Jason. “What Is Inflation?” Investopedia, Investopedia, 14 Feb. 2022, https://www.investopedia.com/terms/i/inflation.asp.

“File:2021 Inflation.webp.” Wikipedia, Wikimedia Foundation, https://en.wikipedia.org/wiki/File:2021_Inflation.webp.

“File:Inflation M2 Cpi.webp.” Wikipedia, Wikimedia Foundation, https://en.wikipedia.org/wiki/File:Inflation_M2_CPI.webp.

Forbes, Steve. “Will Inflation Cause a Stock Market Crash in 2022? - Steve Forbes | What's Ahead | Forbes.” YouTube, YouTube, 7 Jan. 2022, https://www.youtube.com/watch?v=DovQOokDLks.

Hauk, William. “Why Is Inflation so High? Is It Bad?” University of South Carolina, https://sc.edu/uofsc/posts/2021/12/12_conversation_inflation.php#.YiPeqhPMK3I.

Holland , Ben. “The Clashing Forces That Will Drive U.S. Inflation in 2022.” Bloomberg.com, Bloomberg, https://www.bloomberg.com/news/articles/2022-01-11/past-the-worst-why-u-s-inflation-could-fade-or-linger-in-2022.

Little, Penn. “Council Post: Understanding Inflation: CPI Increases and the Causes.” Forbes, Forbes Magazine, 16 Feb. 2022, https://www.forbes.com/sites/forbesfinancecouncil/2022/02/14/understanding-inflation-cpi-increases-and-the-causes/?sh=6f218c8971e8.

Wiseman, Paul. “EXPLAINER: Why US Inflation Is so High, and When It May Ease.” ABC News, ABC News Network, https://abcnews.go.com/US/wireStory/explainer-us-inflation-high-ease-82801371. 

Disavino, Scott. “Oil Prices Surge over 7% as Global Crude Reserve Release Disappoints.” Reuters, Thomson Reuters, 1 Mar. 2022, https://www.reuters.com/business/energy/oil-prices-climb-market-weighs-release-reserves-vs-russia-disruption-2022-03-01/. 

Horsley, Scott. “The Fed Plans to Raise Interest Rates, Though Cautious of Maintaining Job Growth.” NPR, NPR, 5 Mar. 2022, https://www.npr.org/2022/03/05/1084729586/the-fed-plans-to-raise-interest-rates-though-cautious-of-maintaining-job-growth.

Kasriel, Paul L. “Fed Tightening Will Have a Fiscal Effect.” Haver Analytics, 18 Feb. 2022, https://www.haver.com/comment/comment.html?c=220218SP.html.