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Inflation continues to remain high in U.S., world economies: What is the root cause?

Rebecca Barnabi
inflation
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The year-over-year inflation rate in September was 8.2 percent. WalletHub updated its report on Cities Where Inflation is Rising the Most.

The personal finance website compared 23 major metropolitan statistical areas (MSAs) across two key metrics involving the Consumer Price Index.

The report compares data for the latest month for which data is available from the Bureau of Labor Statistics to two months prior and one year prior. This comparison gave the report data about short term and long-term changes in inflation.

Inflation is rising the most in Phoeniz, Ariz., as well as Atlanta, Miami, Tampa and Baltimore, Md. In Anchorage, Alaska, inflation is rising the least, as well as in San Francisco, Washington, D.C., New York City and Denver, Col.

Experts offered comments on the main factors driving inflation in the United States.

“Thanks to a strong job market and generous federal stimulus, consumers are in spending mode, Daniel Roccato, Clinical Professor at the University of San Diego, said in a press release. “But while demand for goods and services is up across the board, supply has not kept pace. Add in a horrific war and supply chain issues and you get global inflation.”

Associate Professor at the University of St. Thomas Tyler Schipper said the main factors are external shocks, such as the war in Ukraine and continued production stoppages in China, continuing pandemic supply chain struggles and increasing input costs, and hysteresis.

“I think the last one requires the most explanation. Even if inflation was initially caused by the Federal Government’s pandemic stimulus or the Fed’s monetary policy, those policies have long since ceased stoking inflation. But inflation can persist as individuals feel inflation, then they ask for higher wages which firms in turn pass on to consumers through higher prices. Once inflation starts, it can take a while to slow down,” Schipper said.

Earlier in 2022, inflation hit a 40-year high of 9.1 percent. Experts respond to what can be done to slow down the rapidly increasing price gains.

“This is the primary responsibility of the Federal Reserve, the monetary authority of the U.S.,” Visiting Assistant Professor at Union College Harlan Holt said in the press release. “The Federal Reserve must signal its credible commitment to pursuing anti-inflationary policy by raising interest rates aggressively. It must also aggressively signal that it will not pay for new debt issued by the Government of the United States by printing money. Increases in the interest rates will likely result in reduced income and economic growth for the immediate future, however, this is the necessary but difficult cost of reducing inflation and inflation expectations going forward.”

According to Professor Robert Eyler at Sonoma State University, consumers can save more money despite rising prices. Mainly inflation is increasing interest rates and moderating fiscal spending.

“Unfortunately, the cost of higher interest rates is to slow business spending and investment, including as much hiring. We should expect workers to lose their job and the number of job openings to drop over the next 12 months. Much of this is a reaction to both rising prices and wages and now rising interest rates,” Eyler said.

Does raising interest rates provide a good or bad solution to control inflation?

“Raising interest rates is a good solution and will ultimately control inflation. This is how the inflationary episodes of the late 1970s ended as well. The incoming Federal Reserve chair, Paul Volcker, aggressively increased interest rates in a short period. The cost was a prolonged recession in the early 1980s, but this was necessary to stop the persistent stagflation in the economy, and eventually led to a long expansionary, low-inflation period from approximately 1984 to 1999. Governments can aid this by pursuing more permissive energy policies including investment in new natural gas and oil ventures and nuclear power plants, providing fewer subsidies for expensive and inefficient renewable sources, rolling back COVID-related regulations that disrupt global supply chains, and lowering the overall level of government spending,” Holt said.

Schipper said that raising interest rates “is probably the only tool with sufficient power to bring down inflation. That does not mean that it will be quick, easy or painless. Economists often think of there being a trade-off between inflation and unemployment. The same tools that the Fed is using to control inflation will also slow the economy. This will likely lead to job losses – an eventuality that the Fed Chair, Jerome Powell, has been telegraphing through his public speeches. The goal is a ‘soft landing’ to use interest rates just enough to bring down inflation without putting the economy into a deep recession. Time will tell if this is possible.”

Rebecca Barnabi

Rebecca Barnabi

Rebecca J. Barnabi is the national editor of Augusta Free Press. A graduate of the University of Mary Washington, she began her journalism career at The Fredericksburg Free-Lance Star. In 2013, she was awarded first place for feature writing in the Maryland, Delaware, District of Columbia Awards Program, and was honored by the Virginia School Boards Association’s 2019 Media Honor Roll Program for her coverage of Waynesboro Schools. Her background in newspapers includes writing about features, local government, education and the arts.

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