Inflation is a major problem in the United States of America

The Bureau of Labor Statistics released inflation data last week which revealed that prices are increasing at a rate 4.1% over last year. This is a major problem for American citizens. It means that the average wage increase of 3.4% last year would actually be a 0.7% decrease in purchasing power. Inflation is a natural problem for most wealthy countries, and the Federal Reserve is required to ensure that the average inflation rate is 2% per year. However, this is an especially big problem right now. The average inflation rate for the last 4 years has been 2.5%, and this one year inflation rate has been 4.1%. The evidence is clear. This inflation is temporary. There are a few major causes of this inflation, and none of them indicate that this is a long-term issue.<br><br>There are two economic schools of thought on inflation: Monetarism and Keynesianism. Monetarism is built around the Quantity Theory of Money, which explains that the value of money is equal to 1 divided by the amount of money in circulation times the amount of money in circulation divided by the value of goods purchased. Monetarists believe that inflation is directly caused by the amount of money in circulation. Keynesians believe that inflation is caused by the amount of demand, and this is a much more modern school of thought. For the past 80 years, the Federal Reserve has been heavily influenced by Keynesian thought. This past year has been the biggest stimulus program since World War II. We have spent $6 trillion, which is 28% of our annual GDP. On top of that, our economy was shut down for a month. This level of spending has never been seen before, and the effects are clear. An increase in demand, like we see in the summer, typically results in a small level of inflation. This level of inflation is astounding. However, the data clearly shows that this is a temporary issue. The inflation rate has been 2.5% for the last 4 years. A one-year inflation rate of 4.1% is a problem, but the long-term inflation rate is still on track with what the Federal Reserve wants.<br><br>This is a problem, but it is not a cause for panic. This issue is not the Federal Reserve’s fault, and they cannot do anything to fix this. It was caused by the COVID-19 outbreak, which forced us to shut down the economy and spend trillions of dollars so that businesses would not go under during the pandemic. The best solution is just to let this inflation play out. The Fed cannot stop this inflation. It is unlikely that they can even slow it down. The Fed has tools at its disposal to slow down the economy, like raising interest rates. However, the recent data shows that this may not be effective at this time. The problem with the pandemic is that it lowers supply while demand increases. Less people have jobs, so fewer goods are being produced. At the same time, the stimulus program was so massive that it has artificially inflated buying power. Buying power exceeds the supply of goods, so businesses raise prices, and inflation goes up. <br><br>Still, even with the huge level of inflation, evidence shows that this is a temporary issue. The long-term inflation rate remains near the Fed’s target of 2%. It has been 2.5% for the last 4 years. This one-year inflation rate is 4.1%, but it is only one year. If you expand the time frame, you can see that the long-term inflation level is stable. The only other recession with a similar inflation spike was in 2008. The inflation level in 2008 was 3.8%, which was the highest level since 1991, and it contracted down to 0.1% the following year. The 0.1% inflation rate was likely artificially low because of the huge spike in 2008, but it still has a point. It went up one year and back down the next. It was a blip. The same thing will likely happen here. The next few years will likely see a much lower inflation rate as a result of this recent spike. A one-year inflation rate of 4.1% is a problem, but a 7-year inflation rate of 2.5% is not.<br><br>A combination of the decrease in supply and the increase in demand from our stimulus packages has caused prices to soar. It’s no mystery why the inflation level is so high. We had the biggest stimulus package in American history and the economy was shut down for a month. We should be thankful that it’s not any worse. The long-term inflation rate is stable, and the problem will fix itself soon enough. It’s not even a problem as of now. It’s just a side effect of the pandemic. If the inflation rate stays elevated for years, then it will become a problem. But right now, it is not. The inflation rate has been 2.5% for the last 4 years and this one-year spike is a temporary increase that will likely contract away in the long run. We should be thankful that the problem is not worse and let things run their course.