There is no escape. In recent months, people have seen the highest inflation rates in almost 40 years – currently close to 7%.
Even the average consumer learns more about inflation than many in their lifetime.
“Inflation was just nothing for a long time, up until the last few months. Unless you’re a professional economist, you haven’t given it much thought,” said Mike Davis, an economist and professor at SMU’s Cox School of Business. “With prices going up 1% to 2% annually, it’s kind of background noise.”
But the current rapid rise in prices cannot be overlooked.
“Everyone sees it in their daily lives, whether you’re buying gas or picking up dinner every day. It’s just everywhere now,” Davis said. “You can’t outrun him. All prices go up. And it’s not just that the price of hamburgers goes up, so you buy chicken – everything’s getting more expensive, so we have to live with that.”
The main cause is the pandemic, which started a cascade of problems when the lockdown began in March 2020, bringing mass production and transportation of essential goods to a standstill. Economies around the world paused and stock markets fell.
“The short answer is we had supply issues, but the original sin was the spending a year ago, that nearly $2 trillion that was basically freed up for the economy,” Davis explained, noting the federal government’s efforts to allocate stimulus pump money, COVID-19 relief and reduced interest rates for the economy. “It really created a lot of demand. So we had supply bottlenecks when there was really high demand because people had a lot of money in their pockets. And you get what you get.”
The current labor shortage and extreme delays in the ports continue to drive up the cost of goods. Demand for these goods has exceeded supply for some time.
On Wednesday, the US Federal Reserve announced it would gradually raise interest rates to ease the pain of inflation.
“If the US Federal Reserve starts raising interest rates, there is hope that this will actually dampen spending. Because when the Fed raises interest rates, it becomes harder to borrow money to buy a car. It’s getting more expensive to finance a home or home improvement project. So hopefully if interest rates rise, some of the excess demand for spending will be dampened,” Davis said. “First, it won’t work overnight. The prime raises won’t even happen until March. And the Fed is planning a series of rate hikes for the remainder of 2022. So this is a journey. It’ll be a while before we get there.”
Davis added that all of this is a balancing act.
“But the Fed is balancing blindfolded on a taut wire in a hurricane. It’s an impossible balancing act,” he said. “The other concern — and no one really knows if that’s going to happen — is that the Fed will tighten too much and if that happens, they’ll send the economy back into recession. I’m not predicting that because I don’t think anyone can. It’s really an issue, it’s something we all need to keep an eye on.”
TIPS FOR SAVING AS INFLATION RISES
The silver lining is that people are starting to think more carefully about their personal finances.
Savings experts from RetailMeNot, a coupon and savings website, shared a list of tips consumers can follow to protect their wallets and save some money:
- Consider putting off big purchases like electronics, a new car, or furniture for now — all of which are hit hardest by rising costs.
- Take advantage of promotional codes and coupons which are the low hanging fruits of the discount world
- Rewards programs and cashback offers from retailers and credit cards give you more bang for your buck.
- Check retailers weekly ads and company websites offering big discounts and BOGO deals to attract shoppers. With some, you simply need to sign up for email or SMS alerts to receive up to 10% or more off your orders.
“There are things that we should all be doing, whether it’s inflationary times or non-inflationary times,” Davis said. “We have to be careful with our credit cards, we have to be careful with our superfluous spending. If you really want that fancy Starbucks cappuccino, get it! But it’s $6, and unless you really need it, that’s the kind of thing we all want to think about all the time.”
Davis said it’s unclear when this price hike will stop.
“Let’s hope that we will stabilize at the rate of increase. We started at #% or 4% inflation, got to 6% and now we’re over 7%. Let’s hope this trend doesn’t continue,” he said.