The monthly budgets of lower and middle-income families have turned upside down over the last year. Prices of almost everything including food, fuel, cars, and even streaming subscriptions have been rising at a fast pace. Why is everything so expensive right now and when will prices come down?
U.S. CPI inflation rose at an annualized pace of 8.3 percent in April. While the rate of increase was lower than in March, it was still higher than the 8.1 percent that economists were expecting. Also, the CPI increased 0.3 percent on a monthly basis. CPI measures the increase in a basket of goods and is a gauge of retail inflation.
How much is high inflation costing U.S. households?
Different studies have put different dollar numbers on the economic pain from rising inflation for the average U.S. household. Most studies put the number at $300 per month, which is just about 5 percent of the average U.S. household income. Inflation is the worst form of taxation and it impacts lower-income families particularly hard.
Why is everything so expensive right now?
Multiple factors are driving up the prices of goods and services in the U.S., which is making everything expensive. First, there's a supply chain crisis that's leading to a demand-supply imbalance. Simple economics would tell us that prices go up when demand is higher than supply, which is the case with many goods right now.
Producers are also feeling the pain of higher prices.
While many have blamed big companies for profiting from the demand-supply imbalance, which is true in some cases, producers have also been feeling the pain of high inflation. Wholesale inflation increased by 11 percent annualized in April while the monthly increase was 0.5 percent.
Prices of key raw materials including metals and energy have spiked, which is leading to higher manufacturing costs. Also, labor costs have gone up considerably in the U.S., which is leading to higher costs for companies. While workers benefit from rising wages, in real terms, many are worse off now because the cost of living has gone up more than the rise in wages.
Higher energy prices impact inflation.
Higher energy prices have a cascading impact on inflation and invariably almost everything gets expensive when fuel prices rise. So, the prices for electricity and piped gas have gone up amid the rise in global energy prices. The price that you pay at the gas station has gone up, and so have taxi prices. Airfares also rise as jet fuel and crude oil prices increase.
Higher energy prices lead to an increase in logistics costs and it takes more to transport the goods to stores, which again makes them expensive.
Supply chain shortages are driving food inflation.
Food prices have also been going up. Global grain prices are running at elevated levels. The Russia-Ukraine war has amplified the price rise since both the countries are major exporters of food products, especially wheat and sunflower oil. Amid rising edible oil prices, Indonesia banned the exports of palm oil, which led to a spike in prices. Rising food and labor costs have forced many restaurants to increase their menu prices.
We also have a domino effect of inflation because wages rise with inflation. This adds to the price rise and makes things expensive.
When will prices come down?
Prices should come down gradually over the course of 2022. Commodity prices have started to soften, which will eventually trickle down to prices of finished goods. The Fed’s rate hikes will also help bring down inflation and the U.S. Central Bank has made it clear that lowering inflation is its top priority.
However, the Russia-Ukraine war remains a wild card. If the situation gets worse, it would impact energy prices and lead to another rise in inflation. The global geopolitical situation is still volatile as more countries in Russia’s vicinity contemplate joining NATO, which Russia has warned would have “consequences.”