What is inflation, and how do we track it? In 2022 consumers felt the effects of rising prices, and as much as experts simplify the definition of inflation, the causes of it remain complex and in constant motion. However, looking back into other historical periods of inflation, we can see the range of causes and what can be done about it now.How does this round of inflation compare to others? To understand the scope of the rising prices, we need to see what causes them.In June 2021, the White House released an article examining comparable periods of inflation starting in 1946. From that time to the present era of inflation, they found six comparable inflationary episodes. The first being from 1946 to 1948, at the end of World War II. The elimination of price controls, supply shortages and pent-up demand led to inflation of around 20%. It also led to a considerable amount of saving, and after the war, a population of 140 million Americans purchased 20 million refrigerators, 21 million cars and 5.5 million stoves. The second period started around 1950 due to the Korean War when households were reminded of World War II and rushed to purchase goods. However, inflation did not jump as high this time.The third period occurred when a bustling economy with a GDP growth of 4.8 percent caused prices to rise. The rise stopped when president Nixon froze wages and prices.The fourth instance was due to surging oil prices in the ’70s and continued until 1982. supply shrank because of an oil embargo by the Organization of Arab Petroleum Exporting Countries and a decline in oil production due to the Iran-Iraq war. The fifth comparable instance was during the Gulf War. The uncertainty led to a short bout of high inflation on crude oil. The sixth and most recent bout of inflation was in 2008. Gas prices skyrocketed and doubled from the previous year, and CPI rose above 5%. The spike was driven by a surge in demand, financial unease and, again, tensions in the Middle East.By looking through the history of inflation, it is easy to see some common denominators in these time periods. The three most recent episodes largely involved oil, and more than half – including today’s surge – are due to war. Despite the similarities, the oil supply issues are not quite the same in every instance. The United States has become more of a petroleum exporter and uses more renewable energy sources today, becoming more energy independent. The rise seen from 1969-71 is also different. The growth of the economy at the time was relatively higher than present day. Which leaves the period after World War II as the closest parallel. Even though the wartime inflation caused supply shortages and great demand, there were no price controls. These controls reduced prices by 30% and, when lifted, made things like food rise 13.8% a month after. There is no perfect scenario from the past that can tell us how and when this bout of inflation will recede. However, the post-World War II period suggests it can quickly decline once supply chains are fully restored and demand levels off.Our modern case of inflation added new variables Our recent jump in inflation can be described somewhat as the perfect storm. Many small factors have compounded to create the rise in prices. The United States was still recovering from the ebbs and flows of the COVID-19 pandemic. For instance, when COVID-19 cases fell, restaurants filled. As COVID-19 cases rose, grocery store shelves emptied. These sectors were at the mercy of rapid swings in demand. However, when supply and demand started to even out, the war in Ukraine halted progress again and interjected new supply chain issues. The supply chain strains from the conflict compounded new transportation problems in the busy economy. Gas and oil restrictions branched off into indirect factors like trade restrictions. These can cause a butterfly effect like in the case of fertilizer. Russia’s suspension of fertilizer exports to the west resulted in farmers having to compensate. To make a profit, farmers have to keep a close eye on production costs. With the rise in demand for fertilizer, they must budget accordingly and thus use less, which reduces yields and quality. Our economic system is multifaceted and a seemingly small change, like not having access to fertilizer, created a huge repercussion for citizens. Are there active steps we can take to fight inflation?Many experts say there is little the government can do to curb inflation, though some efforts have been made. In August 2022, President Biden signed the Inflation Reduction Act that included a tax on high-income corporations, prescription drug reform and tax credits for clean energy. While these do attempt to push back against inflation, they are not a guarantee and also take time to make a larger impact. Raising interest rates can encourage consumers to spend less – decreasing demand – and the federal reserve has made efforts to do so. Interest rates increased seven times in 2022 to cool inflation. These increases came at a higher rate than others. Between 2015 and 2018, rates only increased nine times.Simple steps to fight inflationTo personally combat inflation, individuals can do things like holding off on big-ticket purchases, following a food spending plan and limiting driving through practices like batch errands. Knowing the details of inflation is one-half of the battle. Understanding the chain reaction of global events can put into perspective the delicate balance of the systems we are a part of and how they impact our everyday lives.
What is inflation, and how do we track it?
In 2022 consumers felt the effects of rising prices, and as much as experts simplify the definition of inflation, the causes of it remain complex and in constant motion. However, looking back into other historical periods of inflation, we can see the range of causes and what can be done about it now.
How does this round of inflation compare to others?
To understand the scope of the rising prices, we need to see what causes them.
In June 2021, the White House released an article examining comparable periods of inflation starting in 1946. From that time to the present era of inflation, they found six comparable inflationary episodes.
The first being from 1946 to 1948, at the end of World War II. The elimination of price controls, supply shortages and pent-up demand led to inflation of around 20%. It also led to a considerable amount of saving, and after the war, a population of 140 million Americans purchased 20 million refrigerators, 21 million cars and 5.5 million stoves.
The second period started around 1950 due to the Korean War when households were reminded of World War II and rushed to purchase goods. However, inflation did not jump as high this time.
The third period occurred when a bustling economy with a GDP growth of 4.8 percent caused prices to rise. The rise stopped when president Nixon froze wages and prices.
The fourth instance was due to surging oil prices in the ’70s and continued until 1982. supply shrank because of an oil embargo by the Organization of Arab Petroleum Exporting Countries and a decline in oil production due to the Iran-Iraq war.
The fifth comparable instance was during the Gulf War. The uncertainty led to a short bout of high inflation on crude oil.
The sixth and most recent bout of inflation was in 2008. Gas prices skyrocketed and doubled from the previous year, and CPI rose above 5%. The spike was driven by a surge in demand, financial unease and, again, tensions in the Middle East.
By looking through the history of inflation, it is easy to see some common denominators in these time periods. The three most recent episodes largely involved oil, and more than half – including today’s surge – are due to war.
Despite the similarities, the oil supply issues are not quite the same in every instance.
The United States has become more of a petroleum exporter and uses more renewable energy sources today, becoming more energy independent. The rise seen from 1969-71 is also different. The growth of the economy at the time was relatively higher than present day.
Which leaves the period after World War II as the closest parallel. Even though the wartime inflation caused supply shortages and great demand, there were no price controls.
These controls reduced prices by 30% and, when lifted, made things like food rise 13.8% a month after. There is no perfect scenario from the past that can tell us how and when this bout of inflation will recede. However, the post-World War II period suggests it can quickly decline once supply chains are fully restored and demand levels off.
Our modern case of inflation added new variables
Our recent jump in inflation can be described somewhat as the perfect storm. Many small factors have compounded to create the rise in prices. The United States was still recovering from the ebbs and flows of the COVID-19 pandemic. For instance, when COVID-19 cases fell, restaurants filled. As COVID-19 cases rose, grocery store shelves emptied. These sectors were at the mercy of rapid swings in demand. However, when supply and demand started to even out, the war in Ukraine halted progress again and interjected new supply chain issues.
The supply chain strains from the conflict compounded new transportation problems in the busy economy. Gas and oil restrictions branched off into indirect factors like trade restrictions. These can cause a butterfly effect like in the case of fertilizer. Russia’s suspension of fertilizer exports to the west resulted in farmers having to compensate. To make a profit, farmers have to keep a close eye on production costs. With the rise in demand for fertilizer, they must budget accordingly and thus use less, which reduces yields and quality. Our economic system is multifaceted and a seemingly small change, like not having access to fertilizer, created a huge repercussion for…
Read More:Inflation in perspective
2023-01-20 21:37:00
