RECAP

The Inflation Situation: How We Got Here

The funny thing about the current inflation scare is...it all happened so abruptly.

As the first Covid wave ripped through the US last spring, more than 20 million Americans lost their jobs and the country entered its worst recession in history. With GDP tumbling 31.4% in Q2 2020, the last thing worrying economists was surging prices. After all, for a brief moment, oil prices had just plummeted below $0.

But it turns out the worst recession in US history was also the shortest—by far. Thanks to government stimulus to the tune of nearly $6 trillion, many Americans were able to weather the storm and, flush with cash but restricted to their homes, went full Extreme Makeover.

Consider this: Consumer spending on goods was nearly 26% higher in August 2021 than in January 2019.

Demand is just one element of the price equation

And while demand for goods skyrocketed, supply was not ready to meet it. For a number of reasons—frequent Covid lockdowns in Asia, widespread labor shortages, poor planning—producers were unable to make and ship enough goods to satisfy the ravenous appetites of consumers.

So given this severe demand–supply imbalance, prices started to climb, slowly at first in late 2020 but then really picking up steam as the ball dropped on 2021. The consumer price index, which monitors the prices of a basket of consumer goods, grew 1.7% annually in February but by May had jumped 5%.

The higher inflation readings in spring 2021 were attributed to a few items that had an outsized impact on rising prices. You might remember all the fuss about used cars, which accounted for more than one-third of the monthly price increases in June. This weird dynamic lent ammo to the officials, Fed Chair Jerome Powell included, who argued that inflation was “transitory” and likely to subside once a few pandemic wrinkles had been ironed out.

But Team Transitory is on the back foot right now. This fall, inflation has spread from used cars and energy to items across the economy, from rents to food to apparel. At the same time, wages are surging, which is great for workers but also contributes to inflation, as companies must raise prices on their products to offset higher labor costs.

In October, consumer prices rose at their fastest pace in 31 years, and economists are still debating when inflation will peak.

So that’s how we got here.

Francis Scialabba; repurposed from Axios