February 3, 2023
Eyes4Research
2022 ended with rising prices still on everyone’s mind, and with a glimmer of hope that although inflation might be easing, there was no clear end in sight. Inflation has been rising around the world at the fastest pace in decades in many countries. In addition to the effect that inflation has on the budgets of the average consumer, it also erodes the spending power of our dollars over time, meaning that a single dollar buys less and less over time, ultimately having a damaging effect on the economy and how consumers feel about the economy.
How Inflation is Measured
Inflation is calculated by using what is known as a ‘basket’ of goods that includes the prices of everyday items that we all buy and monitors how those prices are evolving from month to month and year to year. Statistics experts from around the world collate the prices of these things, like gas, food, streaming service fees, and visits to the dentist– then use them to calculate a rate. Different countries have different items in these baskets, and the prices of these items are then used to create a ‘consumer price index’. The change in the price level of these items is the rate of inflation. Inflation in the U.S. was more than 8% in September 2022 and 10.1% in the UK during the same period. That compares with the roughly 2% that most policymakers accept as a stable rate.
What Effect Does Inflation Have on Consumers?
At the moment, as it was in 2022, the prices of goods in many countries are rising quickly, with rates in most developed nations reaching multi-year highs. In the U.S., prices for most goods are higher than they have been in 40 years, with most Americans stating that they are noticing the price hikes more acutely at the grocery store and at the gas pump.
Inflation is largely driven by supply and demand. When consumers’ demand for goods outpaces the rate at which they can be produced, the prices for everything up and down the chain increase, including production and shipping costs. Compounding the effect of inflation on consumers is the fact that although wages are on the rise, the income of the average American has not been able to keep up with the cost of living.
Not surprisingly, inflation also has a direct effect on how consumers feel about the economy in general. When inflation skyrockets, consumer confidence in the economy goes in the opposite direction. A recent Country Financial survey revealed that 88% of U.S. consumers are “highly concerned” about the economy. That number is even higher for people who are still financially recovering from the pandemic. And when consumers are worried about the economy, a shift in shopping habits is not far behind. As a reaction to this persistent inflation, American consumers have gotten accustomed to changing their spending habits, such as dining out less, buying necessities in bulk, switching to lower-priced brands, and shopping at retailers that they perceive as doing a better job at managing prices.
Can Inflation Be Controlled?
Discussions about inflation often use the word ‘monetary policy’. Monetary policy is a term used to describe the various tools that central banks use to try to keep inflation low and stable. Interest rates are a key tool employed to achieve this goal, with the idea that higher rates set by banks will make it more expensive for banks, businesses, and consumers to borrow money. This means that they will spend less, and decrease demand. Lower demand makes it harder for companies to raise prices, which in turn, lowers inflation.
Government policy can also influence inflation, especially by implementing policies to affect the efficiency of the economy. This is intended to result in bringing down long-term costs, and control wages, in order to decrease the risks of a wage-price spiral effect.
One of the more difficult things to predict is how outside events can have an influence on prices around the world. The Russian invasion of Ukraine disrupted and halted the supply of Russian gas to Europe, which pushed UK gas prices up 96% by the end of 2022. That was an event that the UK government would not have been able to control with any sort of policy.
When it comes to inflation, there are some things that government officials can do to mitigate the effects on consumers, and there are many things that can happen that are out of their control. But what is clear is that higher prices are persisting for longer than expected, and consumers will have to continue to figure out how to adjust and manage their household budgets.
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