(NYTIMES) – With consumer prices climbing at the fastest rate of increase in four decades, people are being confronted with more expensive food, fuel and housing.
Many are grasping for answers about what is causing the price burst, how long it might last and what can be done to resolve it.
Here’s a guide to understanding what’s happening with inflation and how to think about price gains when navigating this complicated moment in the world economy.
What’s driving inflation
It can be helpful to think of the causes of today’s inflation as falling into three related buckets.
1. Strong demand. Consumers are spending big. Early in the pandemic, households amassed savings as they were stuck at home and government support that continued into 2021 helped them put away even more money.
Now, people are taking jobs and winning wage increases. All of those factors have padded household bank accounts, enabling families to spend on everything from backyard grills and beach vacations to cars and kitchen tables.
2. Too few goods. As families have taken pandemic savings and tried to buy pickup trucks and computer screens, they have run into a problem: There have been too few goods to go around.
Factory shutdowns tied to the pandemic, global shipping backlogs and reduced production have snowballed into a parts-and-products shortage. Because demand has outstripped the supply of goods, companies have been able to charge more without losing customers.
Now, China’s latest lockdowns are exacerbating supply chain snarls. At the same time, the war in Ukraine is cutting into the world’s supply of food and fuel, pushing overall inflation higher and feeding into the cost of other products and services. Even in the United States, fuel prices are averaging around US$5 (S$6.93) a gallon, up from just over US$3 a year ago.
3. Service-sector pressures. More recently, people have been shifting their spending away from things and back towards experiences as they adjust to life with the coronavirus – and inflation has been bubbling up in service industries.
Rents are climbing swiftly as consumers compete for a limited supply of apartments, restaurant bills are higher as food and labour costs rise, and airline tickets and hotel rooms cost more because people are eager to travel and because fuel and labour are more expensive.
What role does corporate greed play in all this? It is true that companies have been raking in unusually big profits as they raise prices by more than is needed to cover rising costs. But they are able to do that partly because demand is so strong.
It is unclear how long that pricing power will last. Some companies, including Target, have already signalled that they will begin to reduce prices on some products as they try to clear out inventory and keep customers coming.