Inflation in perspective

What is inflation and how do we track it? In 2022, consumers have felt the effects of rising prices, and as much as experts simplify the definition of inflation, its causes remain complex and ever-moving. However, if we look back at other historical periods of inflation, we can see the combination of causes and what can be done about it now, how does this round of inflation compare to others? To understand the scope of price hikes, we need to know their causes. In June 2021, the White House released an article examining similar periods of inflation that began in 1946. From that time to the current inflationary era, they found six comparable inflationary episodes. The first was from 1946 to 1948, at the end of World War II. Deregulation of price controls, lack of supply and pent-up demand led to inflation of about 20%. It also led to a great deal of saving, and after the war, a population of 140 million Americans bought 20 million refrigerators, 21 million cars, and 5.5 million stoves. The second period began around 1950 because of the Korean War when families were reminded of World War II and rushed to buy goods. However, the inflation rate did not rise this time, and the third period occurred when a booming economy with a GDP growth of 4.8% caused prices to rise. The rise stopped when President Nixon froze wages and prices, and the fourth case was due to the rise in oil prices in the 1970s and continued until 1982. The supply contracted due to the oil embargo imposed by the Organization of Arab Petroleum Exporting Countries (OPEC) and the decline in oil production. Because of the Iran-Iraq war. The fifth comparable example was during the Gulf War. Uncertainty led to a short bout of higher inflation on Crude Oil. The sixth and final bout of inflation was in 2008. Gas prices rose significantly and doubled from the previous year, and the consumer price index rose above 5%. This rally was driven by rising demand, financial anxiety and, again, tensions in the Middle East, and by looking at the history of inflation it’s easy to see some commonalities in these time periods. The most recent three episodes are largely oil related, and more than half of them – including the current surge – are due to war. Despite the similarities, oil supply issues are not exactly the same in every case. The United States is becoming more oil exporter and using more renewable energy sources today, becoming more energy independent. The rise observed from 1969 to 1971 is also different. The growth of the economy at that time was relatively higher than it is today. Which makes the post-World War II period the closest parallel. Although wartime inflation caused a shortage of supply and an increase in demand, there were no restraints on prices. These controls lowered prices by 30% and, when lifted, made things like food rise 13.8% a month later. There is no perfect scenario from the past that can tell us how and when this bout of inflation will subside. However, the post-WWII period indicates that it could decline rapidly once supply chains are fully restored and demand levels come to a halt. Our recent state of inflation has added new variables. Our recent jump in inflation can more or less be described as the perfect storm. Many small factors combined to create a price hike. The United States was still recovering from the ebbs and flows of the COVID-19 pandemic. For example, when the cases of COVID-19 fell, restaurants filled up. As cases of COVID-19 rise, grocery store shelves are emptied. These sectors have been at the mercy of rapid fluctuations in demand. However, when supply and demand began to equalize, the war in Ukraine again stopped progress and caused new problems in the supply chain. Supply chain stresses from the conflict have exacerbated new transportation problems in the crowded economy. Gas and oil restrictions branched out into indirect factors such as trade restrictions. These can cause a butterfly effect as in the case of compost. Russia’s suspension of fertilizer exports to the West has forced farmers to compensate. To make a profit, farmers have to closely monitor production costs. With higher demand for fertilizer, they have to budget accordingly and thus use less, which reduces yield and quality. Our economic system is multifaceted and a seemingly small change, such as the inability to access fertilizer, has created massive repercussions for citizens. Are there effective steps we can take to combat inflation? Many experts say there is not much the government can do to curb inflation, although some efforts are being made. In August 2022, President Biden signed the Inflation Reduction Act that included a high-income corporate tax, prescription drug reform, and clean energy tax credits. While these try to fight inflation, they are not a guarantee and take time to make a bigger impact. Raising interest rates can encourage consumers to spend less – lowering demand – and the Federal Reserve has made efforts to do so. Interest rates will rise seven times in 2022 to calm inflation. These increases came at higher rates than others. Between 2015 and 2018, prices only increased nine times. Simple Steps To fight inflation, individuals can do things like postpone big ticket purchases, follow a food spending plan and limit driving through practices like group errands. Knowing the details of inflation is half the battle. Understanding the chain reaction of global events can bring to mind the delicate balance of the systems we are a part of and how they affect our daily lives.

What is inflation and how do we track it?

In 2022, consumers have felt the effects of rising prices, and as much as experts simplify the definition of inflation, its causes remain complex and ever-moving. However, if we look back at 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 price hikes, we need to know their causes.

In June 2021, the White House released an article examining similar periods of inflation that began in 1946. From that time through the current inflation era, they found six similar periods of inflation.

The first was from 1946 to 1948, at the end of World War II. Deregulation of price controls, lack of supply and pent-up demand led to inflation of about 20%. It also led to a great deal of saving, and after the war, a population of 140 million Americans bought 20 million refrigerators, 21 million cars, and 5.5 million stoves.

The second period began around 1950 because of the Korean War when families were reminded of World War II and rushed to buy goods. However, the inflation rate did not rise this time.

The third period occurred when a crowded economy with a GDP growth of 4.8 percent caused prices to rise. The rise was halted when President Nixon froze wages and prices.

The fourth case was due to the rise in oil prices in the seventies and continued until 1982. The supply contracted due to the oil embargo imposed by the Organization of Arab Petroleum Exporting Countries and the drop in oil production due to the Iran-Iraq war.

The fifth comparable example was during the Gulf War. Uncertainty led to a short bout of higher inflation on Crude Oil.

The sixth and final bout of inflation was in 2008. Gas prices rose significantly and doubled from the previous year, and the consumer price index rose above 5%. This rally was driven by rising demand, financial anxiety and, once again, tensions in the Middle East.

By looking at the history of inflation, it’s easy to see some commonalities in these time periods. The most recent three episodes are largely oil related, and more than half of them – including the current surge – are due to war.

Despite the similarities, oil supply issues are not exactly the same in every case.

The United States is becoming more oil exporter and using more renewable energy sources today, becoming more energy independent. The rise observed from 1969 to 1971 is also different. The growth of the economy at that time was relatively higher than it is today.

Which makes the post-World War II period the closest parallel. Although wartime inflation caused a shortage of supply and an increase in demand, there were no restraints on prices.

These controls lowered prices by 30% and, when lifted, made things like food rise 13.8% a month later. There is no perfect scenario from the past that can tell us how and when this bout of inflation will subside. However, the post-World War II period indicates that it can quickly back off once supply chains are fully restored and demand levels come to a halt.

Our modern state of inflation has added new variables

The recent jump in inflation we have seen can more or less be described as the perfect storm. Many small factors combined to create a price hike. The United States was still recovering from the ebbs and flows of the COVID-19 pandemic. For example, when the cases of COVID-19 fell, restaurants filled up. As cases of COVID-19 rise, grocery store shelves are emptied. These sectors have been at the mercy of rapid fluctuations in demand. However, when supply and demand began to equalize, the war in Ukraine again stopped progress and caused new problems in the supply chain.

Supply chain stresses from the conflict have exacerbated new transportation problems in the crowded economy. Gas and oil restrictions branched out into indirect factors such as trade restrictions. These can cause a butterfly effect as in the case of compost. Russia’s suspension of fertilizer exports to the West has forced farmers to compensate. To make a profit, farmers have to closely monitor production costs. With higher demand for fertilizer, they have to budget accordingly and thus use less, which reduces yield and quality. Our economic system is multifaceted and a seemingly small change, such as the inability to access fertilizer, has created massive repercussions for citizens.

Are there effective steps we can take to combat inflation?

Many experts say the government can do little to curb inflation, although some efforts are being made. In August 2022, President Biden signed the Inflation Reduction Act that included a high-income corporate tax, prescription drug reform, and clean energy tax credits.

While these try to fight inflation, they are not a guarantee and take time to make a bigger impact. Raising interest rates can encourage consumers to spend less – lowering demand – and the Federal Reserve has made efforts to do so.

Interest rates will rise seven times in 2022 to calm inflation. These increases came at higher rates than others. Between 2015 and 2018, rates only increased nine times.

Simple steps to fight inflation

To combat inflation personally, individuals can do things like put off buying big tickets, follow a food spending plan, and limit driving through practices like group errands.

Knowing the details of inflation is half the battle. Understanding the chain reaction of global events can bring to mind the delicate balance of the systems we are a part of and how they affect our daily lives.

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