According to economists, how can inflation hurt and help consumers?

Inflation reached a new high in 40 years in June and policymakers are doing their best to tame it – maybe even there is a risk of recession do like that.

Jerome Powell, Chairman of the Federal Reserve, said in June that price stability is “the cornerstone of the economy.” Central banks are sharply increasing borrowing costs to reduce consumer demand and prevent prices from rising.

“The worst mistake we can make is failure – it’s not an option,” Powell speak.

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Senator Joe Manchin, a centrist Democrat from West Virginia, speak Fourth, inflation “poses a clear and present danger to our economy.”

However, while the specter of persistently high inflation can be intimidating for policymakers and consumers, experts point out that, under certain circumstances, some consumers are can benefit from inflation. More broadly, some inflation is actually a good thing for the economy. Let’s look at how this issue unfolds, focusing on consumer impact.

Inflation measures how quickly the prices of goods and services such as gasoline, food, clothing, rent, tourism, and healthcare. The consumer price index, which measures changes in the prices of a broad basket of goods, up 9.1% in June from a year earlierhighest annual increase since November 1981.

However, those prices do not exist in a vacuum. Household income may also increase due to salary increase for workers and cost-of-living adjustment for retireesFor example.

In theory, if someone’s income rises faster than prices, their standard of living should improve. In this scenario, their so-called “real wages” (wages after accounting for inflation) are increasing.

Here’s the problem: Inflation is outpacing historically strong levels salary increase.

According to the U.S. Bureau of Labor Statistics, workers in the private sector saw their hourly wages after inflation fell 3.6% from June 2021 to June 2022. That is biggest drop since at least 2007, when the agency started tracking data.

According to economists, the elderly and others living on a fixed or fixed income could be hit hard by hyperinflation.

“The obvious flip side of what’s happening right now – largely driven but not just by commodity prices [like oil] – According to Alex Arnon, deputy director of policy analysis at the Penn Wharton Budget Model, a research arm of the University of Pennsylvania, people are getting poorer.

This dynamic can have a triggering effect. From a behavioral perspective, consumers can change what they buy to help reduce costs. An outright retracement could lead to a recession, as consumer spending is the lifeblood of the US economy. Private consumption accounts for about 70% of gross domestic product.

About two thirds of Americans owning a home. The value of a typical home sold in May by current owners exceeded $400,000 for the first time and is up nearly 15% from a year ago. follow for the National Association of Realtors. (There are signs of the housing market may be coolingHowever.)

And certain groups will be ahead in an inflationary environment.

For example, some have seen wages rise significantly beyond inflation. According to U.S. Department of Labor data, leisure and hospitality workers, which include restaurants, bars and hotels, saw hourly earnings rise 10.2% in the year to date. June, according to US Department of Labor data – about 1 percentage point higher than the inflation rate. (Of course, just because their pay rise exceeds inflation doesn’t mean these workers necessarily have to earn a living wage. The average non-manager earned $17.79 an hour in June.)

According to James Devine, professor of economics at Loyola Marymount University.

“On the one hand, people gain from inflation (as debtors) but on the other hand, they lose if their wages fall after inflation (as debtors),” Devine said in an e-mail. wage earners),” Devine said in an e-mail.

Generally speaking, it takes a year or more on a daily basis to raise wages to catch up with prices, Devine said.

Then there’s hyperinflation: a rare and “catastrophic” scenario in which inflation rises 1,000% or more in a year, according to the International Monetary Fund. In 2008, Zimbabwe experienced one of the worst episodes of hyperinflation ever, estimated at one point to be 500 billion percent, for example, follow for the IMF.

For example, at these extremes, the price of bread can start and end the day at different levels – a dynamic that can lead to hoarding of perishables and shortages that keep prices up. The value of a country’s currency can drop dramatically, making imports from other countries incredibly expensive.

Brian Bethune, an economist and professor at Boston University, says savings are consumed as the value of money erodes, ultimately leading to less investment, reduced productivity and economic growth. stagnation — a recipe for a chronic recession if left unchecked, said Brian Bethune, an economist and professor at Boston University, of the potential consequences.

To be clear: The United States is not far from this.

“We weren’t there,” according to Edelberg. “We don’t all have to go out and buy rice because we think rice is a better store of value than dollars.”

However, some fear that the Federal Reserve will inadvertently put the US fall into recession because it raises the benchmark interest rate to reduce inflation. That’s not a foregone conclusion; a recession, if it occurs, will be accompanied by job losses and accompanied by financial difficulties.

At the opposite end of the spectrum, there is deflation – a falling price environment, which is also undesirable.

For example, consumers may delay a purchase if they expect to pay a lower price in the future, thereby reducing economic activity and growth, according to the International Monetary Fund.

Businesses may need to take pay cuts for employees, economists say, which workers hate, even if their lower incomes can buy the same amount of stuff (which is also falling in value. ).

The important thing is that it’s low and steady enough that people won’t notice – hence the Federal Reserve’s target rate is around 2% over the long term. (Central bank preferred inflation measureThe Personal Consumption Price Index, which is slightly different from the Consumer Price Index.)

Low, steady inflation helps keep consumer expectations in check. If consumers predict persistently high inflation – even if those expectations remain unchanged from reality – those whims can become a self-fulfilling prophecy.

For example, there is the concept of a “wage-price spiral,” in which workers demand higher wages to keep up with what they expect to be fixed inflation. According to economists, businesses raise prices for consumers to compensate for higher labor costs, which can become a vicious cycle.

In that environment, banks could also increase the borrowing cost of a loan, assuming inflation (and interest rates) will remain high. However, if inflation and prevailing interest rates then drop and borrowers are unable to refinance a fixed loan, they will be hit with a hammer when they have to pay that amount back, Edelberg said.

While consumers expect higher prices in the short term (within the next year), their inflation expectations over the medium and long term (three and five years) fell in May, according to the Federal Reserve Bank of New York. York survey second release.

New York Fed researchers see that as a good sign. The data suggest that inflation expectations have yet to stabilize, meaning the drivers for the wage spiral and self-fulfilling prophecy are unlikely to emerge, the researchers said. said.

Fed Chair Powell recently echoed that view.

“We think the general public sees us as very likely to succeed in bringing inflation down to 2%, and that’s important,” he said in June. “That’s absolutely the key to the whole thing where we maintain that confidence.”