Paradoxes of living with inflation – Nowy Dziennik

Last summer, the consumer price index reached an all-time high in the U.S.: 9 percent annually.

Tomasz Deptuła

Inflation is no longer as high as it was several months ago. We have learned to live with it, especially since it is in a downward trend. However, it still remains at a level higher than what we have become accustomed to in recent decades. Therefore, the Federal Reserve (Fed), the American central bank, still maintains interest rates at the highest level in 22 years.

Last summer, the consumer price index reached an all-time high in the U.S.: 9 percent annually. This was the result of several factors – a sharp increase in energy carriers as a result of the war in Ukraine, supply chains disrupted by the pandemic and huge reserves of cash pumped into society through stimulus programs, and not only in the US. The world has dealt with some of these problems and currently the inflation rate has dropped to 3.7%. However, it is still almost twice the Federal Reserve’s target of 2%. – a trend observed in the pre-pandemic era. Economists even talk about the current time as a period of disinflation, i.e. a slowdown in the pace of price growth. But disinflation still does not mean that it will not be more expensive, only that these increases will be smaller and spread over time. Moreover, inflation is falling, but the milk has already been spilled. Prices remain much higher than a few years ago, which on the one hand puts a strain on consumers’ budgets and, on the other hand, makes employees want to earn more and more to keep up with the pace of price increases.

The Fed estimates that inflation will reach the desired level of 2%. in 2026 at the earliest. Usually, however, taking into account historical experience, this last stage of bringing inflation to the desired level is the most difficult. And there can always be unexpected events that will stimulate inflation tensions.

CONCERNS ABOUT THE ECONOMY

Inflation is making consumers increasingly concerned about the state of the US economy. At least this is according to the first estimates of the University of Michigan sentiment survey. In November, consumers remained skeptical about the long-term economic prospects, and at the same time became increasingly pessimistic about future inflation. The consumer sentiment index fell by 5%. to 60.4 points, compared to 63.8 points. in October. Other sentiment surveys point to an increase in consumer concerns. The current economic climate index dropped to 65.7 points. from 70.6 points, and the expectations index to 56.9 points. with 59.3 points a month ago. “The index of long-term economic prospects declined by 12 percent, partly due to growing concerns about the negative effects of high interest rates,” says Joanne Hsu, director of the study. “The ongoing conflicts in Gaza and Ukraine have also weighed on consumer sentiment.”

SPENDING DESPITE CONCERNS

Interestingly, the same consumers who are concerned about the economy also expect their financial situation to improve. Another paradox is the data on consumer spending, which does not suggest that we will hold on tight to our wallets during the holiday shopping period. The October report showed that consumer spending increased by 0.7%. compared to the previous month and by 0.4 percent. after taking into account inflation. Both numbers exceeded economists’ forecasts. Inflationary pressure even affected aspects of life such as… tips. The phenomenon called “tipflation” involves increased pressure to leave larger sums in the form of additional fees for catering, hotel and transport services. These expectations often arouse negative reactions from consumers – after all, inflation affects everyone, not only drivers and waiters. They are also incomprehensible to tourists from other continents, such as Europe or Asia, where the traditions of leaving tips are less widespread.

FEET INTO INFLATION

One of the most noticeable effects of inflation and high interest rates are the rising costs of loans and credits. This is the result of high interest rates set by the Federal Reserve, which is trying to cool down the economy and make it more difficult for consumers to access money. Mortgage loan interest rates have approached 8 percent, a level unthinkable just a few years ago. However, consumers still have unspent savings from pandemic-era government stimulus programs. Credit card usage is also at an all-time high, despite rising interest rates. Consumers still haven’t stopped spending. This increases inflationary pressure. If we add geopolitical threats, such as the potential impact of the conflict in the Middle East on oil prices, the scale of the threats is enormous. Everyone remembers what happened during the last crisis on the energy market. A possible escalation of the conflict, which would affect the transport of oil from Arab countries and the Persian Gulf, may again cause a price spike.

CNN even warns that Americans’ habit to inflation may become a self-fulfilling prophecy that keeps Federal Reserve bankers awake at night. We will buy more now, for fear that prices will rise quickly, and prices will rise because… we will buy more. “The question now facing policymakers is whether inflation will slow at a time when consumer spending remains so high,” the New York Times wonders. – Companies may find that they can charge higher prices if buyers are still willing to open their wallets. Another holiday shopping season is upon us, and there are many indications that despite declared concerns about inflation and the state of the global economy, we as a society will not stop limiting our spending. This is important because domestic demand generates two-thirds of US GDP. We may find out the answer to the mystery of how deep this year’s discounts will be in just a few days, after Black Friday and Cyber ​​Monday, when the Christmas sales officially start. And for those complaining about rising prices, it is worth traveling to some European countries where the inflation rate is much higher than in America. Or recall the 1980s and 1990s, when interest rates were even higher than today.