Inflation in the United States has reached over 9% in an unprecedented time period, according to the Consumer Price Index, a metric responsible for measuring the economy’s price levels.

Inflation refers to the general rise in prices that results in a decrease of the purchasing power of the dollar, as defined by The New York Times.

Image from Erik McLean on Unsplash.

Today, consumers are feeling this rise in purchases across the board – from groceries to home goods. 

Inflation is an economic phenomenon usually seen when strong demand is met with low supply. This is consistent with what the United Stateshas experienced following the pandemic.    

“After years of low prices, a swift rebound from the 2020 pandemic recession — combined with supply-chain snags — ignited inflation,” states an article from The Observer. 

In 2020, households saved money at an unprecedented rate; expenditures decreased as Americans slowed spending on experience-based goods and services like traveling or dining out. In addition, government assistance checks contributed toward such savings. 

As the market began to open up in 2021, however, Americans began to spend again. Consumers took full advantage of the economy’s re-opening, and showed their support with their disposable income. This caused a rapid increase in what had been dormant demand and was met with a decreasing supply of goods, ultimately forcing prices to rise as a means of establishing a new equilibrium in the market. 

The inflation rate is still rising, however, and there seems to be no immediate solution.. 

The Federal Reserve is the institution responsible for the monetary policy of the United States. It has been raising the interest rate since May 2022,all in an aggressive effort to slow down the economy and reduce inflation. This interest rate policy effectively makes money more expensive to buy with the goal of slowing down investments and economic activity to cool down the economy.

According to the Wall Street Journal, the Federal Reserve has increased the federal funds rate by 0.75%, one of the largest increases in recent history. Currently the most pressing challenge for the Fed is walking the thin line of implementing monetary policy that will slow the economy down to its target 2% rate for inflation without plunging the US into a recession. The effects of monetary policy takes time to observe, however. During that time, a lot of the factors that affect the economy, like consumer behavior, may change and steer the Fed into further murky waters. 

Such actions also have an effect on the stock market as investors see this as a signal for concern over a potential recession. Such speculation causes stock values to decrease. Investors pay attention to such policy changes as portfolio values will decrease in an increasingly volatile market. 

Inflation will continue to be an issue through this year until all the sectors of the U.S. economy find a new equilibrium, in which prices may stabilize and adjust to current market conditions. Until then, consumers will continue to manage a higher cost of living. College students, who are not immune to the patterns of the economy, may have also noticed an increase in their cost of attendance to school as inflation affects meal plans and housing costs. 

As of today, opinions of analysts vary as to whether or not a recession is likely. Companies such as Deloitte and Morgan Stanley have predicted a low chance of a recession in the US economy, whereas Deutsche Bank and Wells Fargo predict a downturn in the economy is more than likely through the end of this year and into 2023. 

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