Virginia Tech economists offer perspective on 12-month inflation uptick
Consumers are feeling the effects of the 41-year-old high mark of inflation with the release of the March 2022 Consumer Price Index from the U.S. Department of Labor’s Bureau of Labor of Statistics.
“The big headline CPI increase is being driven by energy price increases which result from the war in Ukraine. If the drop in core inflation is due to pandemic-related supply constraints easing in the U.S. and elsewhere, then that’s a positive sign,” says Alec Smith, an assistant professor with the Virginia Tech Department of Economics in College of Science, who specializes in behavioral and experimental economics, and neuroeconomics.
On the impact of individual consumers, Smith added, “It’s true that inflation erodes purchasing power. At the same time, wage growth is strong right now, which is helping offset some, though not all, costs. As we work through pandemic-related shortages some inflationary pressures should ease. Energy prices have fallen since last month’s peak, so hopefully energy will have a smaller impact on prices going forward.”
On supply chain disruption, Shaowen Luo Lou, an assistant professor with the Virginia Tech Department of Economics in College of Science, says that China’s new covid restrictions offer quite a lot of uncertainties, with the Shanghai lockdown along with many other places. “I am not optimistic about the lifting of these restrictions, so it is likely to cause a price impact in the U.S., though this may be temporary.”
Lou also points to the viral tweet that stated, “Reminder: if your company is giving you a 5 percent raise this year, they are giving you a pay cut.” In response, he explains that the CPI – and any other price indexes – only measures the cost-of-living change for the general population.
“The inflation impact on people’s living standard is quite varied across the board. First, people have different consumption compositions. People who have a heavy consumption on oil or gas are hit harder by the recent inflation surge than others. Also, people purchase different items,” says Lou.
Lou says that to construct the CPI, the Bureau of Labor of Statistics collects micro prices from the sample of cities to represent the population living in urban areas and unique items based on sales data of retail stores. “There are subgroups of people whose consumption choices are very different from the general population. Thus, the CPI does not accurately reflect the impact of inflation on everyone’s life. It is important for us to understand the spending patterns of the targeted groups or ourselves when we think about the inflation impact.”