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What are the main causes of inflation in the US?

Inflation continues to cut into purchasing power as the holiday season approaches. What is driving the price increases?

Update:
A person shops in the beverage aisle at a grocery store in Toronto, Ontario, Canada November 22, 2022.  REUTERS/Carlos Osorio
CARLOS OSORIOREUTERS

Inflation is decreasing, but consumer prices remain almost eight percent higher than they were a year ago. For many families, this news is troubling as the holiday season approaches, and many evaluate their travel and gift-buying plans in the coming weeks.

The current inflationary crisis is not only being felt in the United States.

Germany has seen prices rise 10.4 percent since October 2021, and consumers in Argentina are trying to keep up with historic inflation that is expected to clock in 73.5 percent higher in January 2023 compared to the same period this year.

Around the world, the supply chain breakdowns caused by the covid-19 pandemic, the energy crisis caused by the Russian invasion of Ukraine, and corporate greed are leading to higher prices across critical markets, including food and shelter.

China’s zero-covid policy

After nearly three years since the covid-19 pandemic lockdowns began, some in China have had enough. The country has continued to move forward with its “zero-covid” policy, and hundreds of protestors in several major cities are demanding an end to the rules. While many media outlets in the US and Europe are reporting on the protests, highlighting the fact that many hold anti-government sentiments, there is no good data on the popularity of the policy within the general population.

That is not to say that those standing up for what they believe are not brave. Protestors, many of whom are students, are taking to the streets are doing so under threat of detention. Within any system of governance, dissent by the people will exist, and suppressing those with an opposing opinion has rarely proved a sustainable strategy to assert dominance and control.

These protests come as China reports 40,000 new covid cases, a recent record for the country home to over a billion people. When cities shut down, there are implications for global supply chains because so many run through China and are dependent on the labor of Chinese workers. When these workers are required to stay at home, production of goods stalls and can lead to shortages. Basic economic principles remind us that prices will rise when goods are scarce, and demand does not decrease.

Inflation and the Global Energy Crisis

After the Russian invasion of Ukraine, energy prices sky-rocketed as Russian production fell and countries began to impose import bans on the country’s energy commodities.

In the US, prices at the pump surged as companies looked to new markets to purchase crude oil and other refined petroleum products. As gas prices rose, inflation took on a new life as the increases in energy markets began to affect transportation and logistics costs for other goods.

While in September, gas prices fell on average 4.7 percent across the US, those gains were nearly wiped away when a 4.4 percent increase was tracked in October. Similarly, natural gas prices remain twenty percent higher than a year ago. With fuel oil clocking in at 68.5 percent higher, households are expected to pay more in utilities this winter.

Good/ServiceYear-over-Year Increase (%)
Food at home (groceries)12.4%
Gasoline 17.5%
Utilities (natural gas)20%
Electricity 14.1%
New cars 8.4%
Used cars2.0%
Apparel 4.1%
Shelter 6.9%

As the war in Ukraine continues, the results are devastating at a humanitarian level, in and outside the country. As winter approaches, Ukraine and its neighbors are growing concerned about how they will be able to provide the energy resources necessary for their citizens to keep warm.

In the United States, it may be costs and not access that could pose a barrier to many households, with the federal government estimating that utility bills could be twenty-eight percent higher than last winter.

Corporate greed continues to contribute to high energy prices

This news comes as the US Energy Information Adminstration also reports that while oil and gas companies are raking in record profits, their capital expenditure remains low.

“Similar to recent quarters, companies kept capital expenditure below historical levels and redirected their increased cash from operations toward debt reduction, share repurchases, and dividends,” reads the report.

For context, in 2019, when oil companies earned just under $40 billion, they invested more than that amount in capital expenditure. Yet, through October 2022, these companies had grossed more than $60 billion and are only directing around $30 billion towards capital investments, which could keep prices high as production is unlikely to increase significantly.

The Biden administration has attempted to entice companies to boost production and refining capacity by saying that if crude oil prices come down, the government will buy directly from them to replenish the national strategic supply.

Since the White House’s announcement in late October, domestic production has not budged, hoovering anywhere between 11.9 and 12.1 million barrels a week since September.

Windfall tax could be imposed in the US

If the White House’s offer to oil companies does not bring them to increase production, an idea floating around Capitol Hill and state houses to impose a windfall profits tax might.

At the federal level, the likelihood is lower than in states like California, where the idea seems to have more momentum. However, CalMatters has reported that the legislature may not take up the measure until January.