FINANCIAL NEWS
US economy: what are the 3 main causes of inflation and why does it happen?
Inflation is likely to remain persistent throughout 2023 due to a number of reasons such as price gouging.
Nearly every American has been feeling the squeeze on their wages due to the huge inflation pressure in 2022. Efforts have been made in an attempt to deal with the problem but while the rate is down on the highs of last year there are predictions it could last through to 2024.
Inflation is typically caused by three things:
- Demand-pull: this is when there are not enough giids being produced to keep up with demand, making those goods in existence more valuable.
- Cost-push: the cost of producing products rises, making producers increase prices to not go bust.
- Wage-price spiral: worker wages increasing means employers raise prices, making employees ask for more money. The cycle continues. However, this theory of inflation has been disputed by left-wing economists.
However, there are also other things that can cause inflation.
What is causing inflation in the US?
Since 2022 the Fed has been steadily increasing interest rates in a bid to combat infaltion. The most recent rise was by a quarter of a percentage point in February, to a target range of 4.5%-4.75%, the highest since October 2007. Annual inflation is still at 6.4% using the CPI measurement.
“Inflation data received over the past three months show a welcome reduction in the monthly pace of increases,” Fed Chairman Jerome Powell said at the time. “And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”
The idea is that increased interest rates will decrease borrowing and disrupt spending power, thus dealing with inflation. However, this would only happen if inflation was caused by too much spending power. Data shows us this is not the case.
Increased prices are being driven in the US primarily by price gouging, profit-price inflation. Companies are using the excuse of increased costs of labour, energy, and materials as an excuse to hike up prices. Wages grew at a 5% rate in 2022, nowhere near the inflation rate for basic necessities such as fuel, which grew in price by a whopping 41%.
Former labor secretary Robert Reich agrees. In an article penned in 2022 he explained his reasoning.
“Why are grocery prices through the roof? Because just four companies control 85% of meat and poultry processing,” Reich wrote. “Just one corporation sets the price for most of the nation’s seed corn. And two giant firms dominate consumer staples.”
Evidence for this can be seen in an example: eggs.
In the latter, egg companies have increased prices by 150% compared to January 2022. This has led to a congressional demand for answers as to why eggs are so expensive. While hiking prices, companies like Cal-Maine foods have recorded 600% increases of profit for 2022, proving that it is in fact the wages of Americans that is keeping any sort of chain on the prices. If costs to produce eggs were getting so expensive, how can profits be at such high levels?
When inflation is back to Fed-approved levels don’t expect prices to suddenly go back to normal; corporate greed is here to stay.