There's no escaping it. In the last few months, people have experienced the highest inflation rates ever seen in nearly 40 years – pushing nearly 7% currently.
Even the average consumer is learning more about inflation than many have in their lifetimes.
“For a long time now until the last few months, inflation just has been nothing. Unless you’re a professional economist you didn’t think much about it,” said Mike Davis, an economist, and professor at the SMU Cox School of Business. “With the prices going up 1% to 2% a year, that’s kind of background noise.”
But the current rapid rise in prices is impossible not to notice.
“Everyone is seeing it in their daily lives, whether you’re buying gas or picking up daily dinner. It’s just everywhere now,” said Davis. “You can’t escape it. All of the prices are going up. And it’s not just – the price of hamburgers going up so you buy chicken – it’s that everything gets more expensive, so we have to live with it.”
The root cause is the pandemic, which started a cascade of issues when lockdowns began in March 2020, bringing the mass production and transportation of crucial goods to a stop. Economies across the world paused and stock markets dropped.
“The short answer is that we had supply issues but the original sin was the spending that happened a year ago, that almost $2 trillion that was basically released on the economy,” explained Davis, pointing to the efforts by the federal government to pump stimulus money, COVID-19 relief, and slashed interest rates into the economy. “That really created a lot of demand. So we had supply shortages with really substantial demand because people had a lot of money in their pockets. And you get what you get."
The current labor shortage and extreme delays at the ports are further driving up the cost of goods. Demand for those goods has been outpacing supply for a while now.
On Wednesday, the federal reserve announced it will raise interest rates as a way to ease the pain of inflation, but gradually.
“If the federal reserve begins to raise interest rates, then the hope is that will actually put a damper on spending. Because as the Fed raises interest rates, it becomes harder to borrow money to buy a car. It becomes more expensive to finance a house or a home improvement project. So as interest rates go up, hopefully, some of the excess demand in spending will be tamped down,” Davis said. “First of all, it’s not going to work overnight. The first-rate increases aren’t even going to happen until March. And the Fed is planning a series of rate increases over the rest of 2022. So this is a journey. It’s going to take a while to get there."
Davis added all of this is a balancing act.
“But the Fed is balancing blindfolded on a tight wire in a hurricane. It’s an impossible balancing act,” he said. “The other concern – and no one really knows the answer as to whether it’s going to happen – is that the Fed tightens too much and if that happens, they send the economy back into a recession. I’m not predicting that because I don’t think anybody can. It’s really a concern, it’s something we all have to watch.”
TIPS TO SAVE AS INFLATION RISES
The silver lining to this is that people are starting to think more carefully about their personal finances.
- Consider holding off on big purchases for now such as electronics, a new car, or furniture – all of which are most affected by rising costs.
- Take advantage of promo codes and coupons, which are the low-hanging fruit of the discount world
- Reward programs and cash back offers from retailers and credit cards will get you more bang for your buck.
- Check retailer's weekly ads and company websites, which have been big on offering discounts and BOGO offer to lure in shoppers. Some require you to simply sign up for email or text message alerts to acquire up to 10% or more off of your orders.
“There's things that we should all be doing, whether it’s inflationary times or not inflationary times,” said Davis. “We got to be careful with our credit cards, we’ve got to be careful with our extraneous spending. If you really want that fancy Starbucks cappuccino, get it! But it is $6 and if you don’t really need it, that’s the kind of thing that we all want to be thinking of all the time.”
Davis said when this rise in prices will stop is anybody's guess.
“Let’s hope that we stabilize on the rate of increase. We started off with #% or 4% inflation, we got to 6% and now we’re over 7%. Let’s hope that trend doesn’t continue,” he said.