Inflation
By Felix Lemm
The cost of groceries has soared 13 percent in the past four years, squeezing budgets and forcing many Americans to cut back on essentials. “I honestly do not know what it is,” according to Rowan Bird, 804. Since the price of consumer goods is rising, it is important to consider why this is happening. The COVID-19 pandemic, as well as the war in Ukraine, have left a huge dent in the United States economy. As a result of the increase in inflation, the purchasing power of the U.S. dollar has weakened in recent years. Many big banks believed that because of a decrease in consumer spending, there would be a huge crash in the economy. This is known as a recession.
In recent months, after the pandemic eased inflation, the risk of a recession is no longer there.
The term "inflation" was coined to describe the increase in the price of goods and services leading to a decline in the purchasing power of money. For example, in 2013, a tall latte at Starbucks cost about $3.45. Fast forward to 2023, the price for the same tall latte has increased to $4.25. This increase is not because drinks became more scarce or more expensive to make. It’s an example of inflation. In today's economy inflation can be seen in fuel, transportation, and meat products are seeing some of the steepest increases.
The reason for the recent increase in inflation in recent years has several contributing factors that all add up to the increase in pricing that we see in stores today. One major reason is the Covid-19 pandemic, where lockdowns prevent consumers from going anywhere. This disrupted production and transportation systems globally, creating blockages and delays in moving raw materials and finished goods and increasing transportation costs. The end of the pandemic resulted in lockdowns being lifted, and the demand for consumer goods increased, exceeding the ability of supply chains to ramp up production quickly. This imbalance of high demand and a further supply limit increased prices.
Shrinkflation, on the other hand, is where the price of goods does not increase; however, companies reduce the size of their product to maintain the same price of a product. For example, the sports drink Gatorade has shrunk from 32 ounces to 28 ounces, while the price has remained unchanged.
“Everything is getting smaller,” says an anonymous student.
Take, for example, a carnival to explain why these phenomena occur. Imagine you’re at a carnival, and you have a certain number of tickets to spend on rides. Now suppose the carnival is becoming more popular and the management decides to add more exciting rides and games, hire more staff for better service, or pay higher prices for ride maintenance. To finance this, the carnival might need to increase the amount of tickets needed for each ride—inflation. Maybe the carnival is known for its low pricing and can not increase the price, so they decide to keep the ticket cost the same, but reduce the duration of the ride. This is known as shrinkflation.
Rownan Bird from 8th grade feels that “Companies are being cheap but keeping the same price or even becoming more expensive.”
The Federal Reserve can influence inflation in today's economy by adjusting interest rates. If inflation is high, the Fed might raise interest rates to slow down spending and cool the economy. This is like the carnival management reducing the number of tickets sold to prevent overcrowding. In recent years until recently, the Federal Reserve has increased interest rates to extreme heights, however in recent months, they have been lowered.
In the past two years, Federal Reserve officials aggressively raised interest rates to mitigate inflation without triggering damage. Despite initial doubts about this strategy, the possibility remains that the analysis was accurate, but timing played a crucial role. The impact of higher interest rates on the economy takes time, and this delay might be more prolonged than usual. While high-interest rates have affected both businesses and consumers, some initially cushioned the blow by refinancing debt during low-rate periods. However, these buffers are diminishing, with savings depleting, credit card borrowing soaring, and various economic supports waning. The housing and manufacturing sectors have already experienced recessions, and the strength of consumer spending now becomes pivotal in sustaining the recovery. If the job market weakens, consumers might become more cautious, potentially impacting their spending habits.
“Things have gotten way more expensive, like if I wanted a bag of chips it was $2.50 and now it is $3… I don't like it.” said an anonymous student.
In addition, the war in Ukraine disrupted the global energy market, leading to significant increases in oil and gas prices, feeding into the cost of transportation and production, and adding to the increase in prices. In general, all these factors lead to not enough product for too many consumers. and companies increasing the prices of products to discourage consumers from buying that product to maintain their supply. Because of this the Federal Reserve acts as the central bank and is trying to mitigate the inflation and get it to its usual rate of two percent per year. The Feds do this by raising interest rates while making borrowing money more expensive which can slow down economic activity and reduce the need for goods and services.