Last week, the U.S. government reported the consumer price index for January rising by 7.5% year-over-year. Why is inflation out of control?
The pandemic-driven lockdown in 2020 and again in 2021 disrupted the supply chain. Prices rose as component supplies fell. New car availability declined. This led to the cost of used cars increased by 40% Y/Y. The CPI does not adequately capture the inflationary pressures for those buying a vehicle.
Governments around the world issued stimulus checks. This added money to the economy. It also encouraged workers to quit their jobs when businesses reopened. If the worker's decision not to return to a salary job is permanent, it will lead to a perpetual shortage in the workforce. This is inflationary.
Workers are expecting a wage increase to offset higher inflation. Companies may offer an increase of less than 7.5%. Workers may quit instead. They might find a higher-paying job, leave the workforce, or start their own business.
The U.S. infrastructure bill cannot have come at the worst time. It will promote clean energy markets like solar energy, electric vehicles, and battery technologies. Still, with raw materials and employees in short supply, the spending bill adds to inflation.
A Fed rate hike is only a start. The government must carefully reduce the money supply and slow stimulus spending plans.
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