The effects of inflation

In 1986, many things happened such as the nuclear reactor accident at Chernobyl, the Oprah Winfrey Show debut and the Soviet Union’s space station launch. That was years ago, but there are some things we have in common with the world of 1986, such as inflation going up 8.5% this year. What is inflation, and how will it affect all of us?

Inflation is defined by Investopedia as “a general increase in prices and fall in the purchasing value of money.” The biggest area that has been hit by this inflationary period is fuel. The Consumer Price Index indicates that fuel oil prices have increased 70.1% in the last year. This has been expected to rise, due to the United States halting the import of Russian oil. Prices for other items and services such as electricity (11.1%), cereals and bakery products (9.4%) and fruits and vegetables (8.5%) have all increased by at least that 8.5%. 

There are different things that cause inflation. We are at a time when we have multiple things contributing to the price increases. The first factor to account for is the printing of money. It is generally understood that when the Federal Reserve prints more money, prices will go up. Since January of 2020, the Federal Reserve has printed about 80% of all United States dollars in existence. Other contributors to this issue are supply chain shortages. The price of cars has increased 12.5% largely due to shortages of semiconductor chips that are typically imported from Taiwan. The last large contributor is the obvious gas price increase.

Online shoppers are about to see the effects of inflation in a different way. According to documents put out by Amazon, there will be a 5% fuel and inflation fee when merchants use Amazon's shipping and fulfillment services. This charge is expected to begin on April 28. Merchants have often complained to regulators about the power Amazon enforces upon them, having a damaged relationship with the company that likely will be further damaged due to this charge.

How will the Federal Reserve fight inflation? Typically the key to inflation is to raise interest rates but in the perfect way. If the Fed raises rates too much, they increase the risk of a recession hitting, but if they don’t raise them enough, inflation will keep hammering consumers. Economic data is currently suggesting that rates will rise more than usual in May, and then potentially in June and July. Federal Reserve Board Member Christopher Waller suggested that this may be the peak, and it may start coming down, which would be a great reality for consumers.

By Andrew Schwartz