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How far has the inflation crisis in the US been?

American consumers are being affected from all sides: Supply chain constraints and high demand mean delayed delivery of products and services and increased costs. The spike in gas prices due to the Russia-Ukraine conflict has made the situation even more difficult.

According to a report by the University of Michigan on March 11, US consumer sentiment about the economy is becoming more negative than expected. The consumer sentiment index fell to 59.7, the lowest level since 2011. Money market economist Thomas Simons said: “This sentiment indicator is negatively correlated with inflation, and therefore, the decline over the past few months reflects calculations with last year’s cumulative inflation.”

How far has the inflation crisis in the US been?  - first

American consumers are being affected from all sides. (Artwork: CNBC)

The highest inflation in 40 years

U.S. consumer price growth hit 8% in February, before energy prices skyrocketed, putting pressure on the Federal Reserve to tighten monetary policy.

According to the US Bureau of Labor Statistics (BLS), the consumer price index (CPI) increased by 0.8% in the January-February period, following a 0.6% monthly increase in the previous period. .

Compared to 2021, prices in the US have increased by 7.9%, the fastest annual increase since January 1982. While price-sensitive commodities like food and energy aside, the “core” CPI also rose 6.4% over that period, or 0.5% month-on-month.

The announcement of sanctions by the United States and its Western allies, including an American ban on Russian energy imports, sent global energy markets to a boil, sending gasoline and oil prices soaring. Prices for wheat, nickel and other commodities also spiked.

According to the BLS, even before this hostilities, the 6.6% increase in gas prices accounted for nearly a third of the monthly CPI increase in the US. Energy prices are now about 25% higher than in the same period a year ago.

Meanwhile, food prices rose to their highest level since April 2020. BLS said more than 40% of the monthly increase in core CPI was due to a 0.5% increase in housing costs, a 0.6% increase in rent and a 2.2% increase in hotel costs.

The war in Ukraine is expected to push overall inflation even higher. Economists fear that a protracted crisis will not only slow growth but also drag on inflationary pressures that have already begun to take root across the entire US economy.

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Inflation in the US increased to the highest level in 40 years. (Source: Financial Times)

Prices rise, rise and rise

The United States has the largest economy in the world, but over the past two years it has faced its generation’s biggest challenges. Shrink too fast, inflate too fast. The continuing upheavals have left millions of Americans through a period of seemingly unprecedented inflation, as prices rose, and rose, and rose.

In February 2020, the US economy still seemed to be “healthy” as usual. Low unemployment rate. Green stock market.

Already COVID-19 arrived. Millions of people are unemployed. Companies closed. Faced with the risk of a complete economic collapse, the US government deployed support measures.

The US Federal Reserve Bank (FED) began to pump money in. The White House and Congress put out trillions of dollars in plans to help families and companies. Businesses began to reopen and hire people.

In early 2021, support measures seem to be getting things back on track. Millions of Americans meanwhile are also vaccinated and feel safer. Children go to school again. Sports leagues reopen. The scariest days seem to be behind.

But the economy has yet to return to normal. On the contrary, after a period of near collapse, the “ball” of the US economy is now inflating too quickly. People are spending more and more, buying furniture, cars, houses and goods. This makes everything more expensive. It is difficult to supply everyone with goods at the same time. So the price goes up even more.

Usually, when prices rise, purchasing power decreases. But this time, something strange happened. The higher the price, the more people buy. More than. More and more. Push the price higher. Rise even higher.

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Bring the “ball” back to the ground

The Fed is trying to control this inflation, starting to raise interest rates, reducing the heat to help get the economy back on the ground.

But things are not so simple. Russia’s military deployment into Ukraine creates a whole new crisis that drives prices even higher.

Geopolitical tensions are not expected to cause the Fed to deviate from its original plans, with traders still arguing at least six times over raising interest rates this year. Conflict, however, could complicate the path forward for these monetary policies.

Fed chair Jerome Powell said that a half-point rate hike, which has not been used in more than two decades, has been an option available in some discussions.

Brian Smedley, chief economist at Guggenheim Partners, expects the Fed to proceed with caution. Still, grappling with a “huge commodity supply shock” is likely to continue to drive inflation, he said.

Overall, it is uncertain which direction the US economy can go.

Increasing interest rates will slow down inflation. But this is a period of many anomalies – a war raging in Europe, the virus causing the pandemic to drag on. If the Fed raises interest rates too much, that could harm the US economy. But if the increase isn’t enough, inflation could push prices to new highs, putting enormous pressure on families already struggling to pay the bills.

In the latest developments, the FED decided to increase the federal funds rate by 0.25 percentage points, forecasting the federal interest rate will reach 1.75-2% by the end of this year.

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