May 2, 2022

Inflation Hits a 40-Year High, and Businesses Ponder the Possibility of Recession

As we head into the second half of Q2 2022, all eyes are on the US Federal Reserve, as thousands of stores, companies, and industries gradually returning to business as usual are facing a new scourge. The recent inflationary surge is making survival more challenging even with relatively inexpensive capital costs and consumer spending. Moreover, not many people are aware of the causes of inflation in the US this year.

So, before you urge the Fed to apply the brakes, learn about the different economic factors causing this surge and leading the economy into a recession. But first, taking politics out of it the best I can, consider the current events.

Record-Breaking Inflation

In March 2022, inflation in the US rose by around 8.5%, which is the highest since 1982, according to the Labor Department’s consumer price index (CPI). Since 2021, the average cost of groceries has increased by 10%, while food overall costs have risen by 8.8%. A gallon of gas is almost as high as it was during the 2008 crisis – around $4. Moreover, the increase in demand for used cars has increased their prices by over 35% since March 2021.

Although most economists believe March to be the peak of the inflation curve this year, it’s going to take months before it gradually drops. It may prompt the Fed to take a more aggressive approach to tamp things down. The only problem is that many things are beyond their control as the world is still recovering from COVID-19, there’s a war between Russia and Ukraine, and many other issues enforcing the hike in process.

Whatever the Fed decides to do during this period will have both good and bad consequences, especially for small businesses. The good news is that most businesses have already survived the worst economic period during the pandemic.

Therefore, they’re likely to navigate through this storm while watching the higher rates throw cold water on unnecessarily overheated prices in volatile industry segments, such as food and energy. Of course, this could also kill the demand for certain products and send the country toward recession inadvertently.

There’s also an increased risk of layoffs, which would cause major problems especially following the Great Resignation, which saw millions voluntarily quit their jobs. From a consumer’s perspective, this could put the power back into employers’ hands as people would be forced to trade off satisfaction and other intangible benefits to meet their physiological needs.

3 Causes of Inflation in the US in 2022

As 2022 quickly progresses into a less turbulent period after March 2022, inflation is becoming more persistent in our vibrant economy, and prices are expected to rise in the long run due to the four main causes below:

1. Rising Labor Costs

Labor Costs Rise2021 was the year of the Great Resignation, as mentioned above. People were voluntarily quitting their jobs if employers couldn’t meet their pay and work demands. With so much labor shortage, businesses had no choice but to increase wages. Thus, rising labor costs forced businesses to pass the cost on or manage with lower margins.

In either case, this ultimately resulted in cost-push inflation as businesses are now operating at higher costs. Higher wages increased workers’ spending power, who, in return, increased the demand for certain goods and services, affecting its supply in the process and causing demand-pull inflation.

2. Global Chip Shortage

Global Chip ShortageIf you’re wondering why used car prices are increasing, one of the main reasons is the global chip shortage. This shortage began in late 2020 during the lockdowns, which saw the overall consumer demand for new cars drop exponentially within months. To make up for the loss, chip manufacturers shifted their focus to consumer electronics and work equipment following the rise of remote work and infrastructures.

This shortage has directly correlated with inflation, especially in the automobile sector, with new vehicle prices jumping nearly 12% and used car prices rising by an astounding 37%. Moreover, chip shortage has an indirect effect on the entire supply industry. As a result, everything is more expensive now, from components to semi-finished and finished goods.

3. Soaring Gas Prices

Gas Prices RiseThe US is the world’s largest oil producer, with Saudi Arabia and Russia in second and third place. Russia recently shocked the world by invading Ukraine, which disrupted the global oil supply chain and markets. Even though prices were on the rise prior, the Russia-Ukraine war has sent gasoline prices skyrocketing since then. Even though the US doesn’t import much petroleum from Russia, it has still been affected by the war as oil is a global commodity.

The US has about 700 million barrels of oil in reserve which would only last the country about one month. President Biden has already used the reserve twice, but it didn’t make much difference in price. The 8% of the US imports from Russia served an important purpose – to compensate for the outdated refineries in the country. These refineries were built for heavier, sulfur-rich crudes compared to the lighter, sweeter ones found in its soil today.

Simply put, when oil prices increase globally, the US doesn’t have the luxury of pumping more to avoid buying from international markets. Thus, it has no choice but to follow the market trend and adjust prices accordingly.

Wrap It Up

Of course, several other macroeconomic factors are playing their role in surging prices, including the roaring real estate market, supply-demand imbalances, and high entry prices. However, the causes highlighted continue to keep the Fed on its feet and prompt it to take risky measures to get things under control.

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by Bobby J Davidson

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