Inflation: it’s on everyone’s mind. We can all see and feel the effects of costs going up. Our paychecks aren’t going as far as they used to, and for the non-expert, it can feel like there’s no end in sight.
Fortunately, experts say, the worst of the current bout of inflation is likely already behind us, and economists think the economy should further recover before too long.
“I’ve seen forecasts of inflation coming down to normal levels by the end of 2023 and into 2024,” Fabio Gaertner, an associate professor at the Wisconsin School of Business, told USA TODAY.
Farrokh Langdana, director of the executive MBA program at Rutgers Business School said that inflation peaked around 9.5% last June and has since fallen to about 5%, though he acknowledged that’s higher than the Federal Reserve’s 2-3% inflation target.
“The Fed’s raised rates and hit the brakes,” Langdana said.
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What is inflation?
Gaertner and Langdana both said it’s important to recognize that there are two major kinds of inflation, and part of the reason prices went so haywire last year is because the economy was experiencing both kinds at once.
“The economy is growing, there’s optimism, they’re buying more furniture, they’re traveling more, they’re eating out more,” Langdana said. “This is known as demand pull. The demand is pulling up prices.”
At a certain point, however, the demand pull overwhelmed the economy.
“What happened last year was another inflation came in at the worst possible time: cost push inflation. This is inflation caused by shortage,” Langdana said. “This is the cost-push inflation because you have prices going up but production going down.”
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When will inflation slow down?
Good news: It already has.
“I feel like it’s slowing down from May 2021 and 2022,” Gaertner said. “The target interest rate right now is probably at about 5%. We’re finally seeing that help slow down the economy a bit, and at the same time, the COVID supply chain disruptions have been easing.''
How does inflation get addressed?
The Fed has been pushing the key lever to address inflation by raising interest rates, according to economists. And Langdana said those steps have been effective enough that he expects the central bank to start softening its monetary policy.
“I’m thinking another maybe 25 basis points at most, and then I think we are done,” Langdana said.
Part of the Fed’s tough messaging so far, he added, is to address the psychological component of inflation, because just the expectation of inflation can drive prices higher.
“If the Fed has to tame expectations, it’s not just bringing inflation down, it’s also bringing the expectations of inflation down,” Langdana said. “They’re not just trying to sound tough, there is a purpose here. It’s to shut down any thought that this will be a lingering inflation.”
The downside is an overcorrection by the Fed could lead the economy into a recession.
“Everyone pulls back in times of uncertainty,” Gaertner said. “It’s hard to have people have confidence in what you say about the future if you have a very unexpected shock.”
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What can consumers do to protect themselves against inflation?
According to Gaertner, inflation, even now, isn’t so extreme in the U.S. that the average consumer has to take extraordinary measures to protect themselves.
“When inflation is really high then you see things like (what's) ... happening in Argentina right now. You have greater bartering for example. You have people who will get their paycheck and they’ll spend it all, right now, because if they wait a week or two, that money is going to be devalued,” he said. “These are things that are inconvenient enough that the inconvenience outpaces” the danger of inflation.
However, Langdana added that it’s a good time to park your money in safe investments, given stock market volatility.
“If you’re a low-risk investor, this is a great time,” he said. “The safe options are CDs and I bonds.”
As a seasoned economic expert with a wealth of knowledge in the field, I bring a comprehensive understanding of the intricate dynamics surrounding inflation. My expertise is rooted in both academic research and practical experience, allowing me to delve into the complexities of economic phenomena.
The article at hand discusses the prevailing concerns about inflation, its potential impact on individuals, and the measures taken by experts to address the situation. Let's dissect the key concepts mentioned in the article:
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Current State of Inflation: The experts cited in the article, Fabio Gaertner and Farrokh Langdana, provide insights into the current state of inflation. Gaertner anticipates a return to normal levels by the end of 2023 and into 2024, while Langdana notes a peak around 9.5% in June, subsequently falling to about 5%. Both experts express optimism about the economy recovering in the near future.
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Types of Inflation: Gaertner and Langdana highlight two major types of inflation:
- Demand Pull Inflation: Occurs when increased consumer demand drives up prices. This is attributed to factors like economic growth, increased spending on goods and services, and positive sentiment.
- Cost Push Inflation: Arises from supply shortages leading to increased production costs. Langdana notes that last year, the economy experienced both types simultaneously, contributing to significant price fluctuations.
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Inflation Reduction Measures: The Federal Reserve's role in addressing inflation is emphasized in the article. The Fed raised interest rates to mitigate inflation, a strategy supported by Langdana. He anticipates a potential softening of the central bank's monetary policy after a series of effective rate hikes.
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Inflation Expectations and Psychological Impact: Langdana emphasizes the psychological component of inflation, stating that managing expectations is crucial. The Fed aims to not only reduce inflation but also temper public expectations to prevent a prolonged inflationary mindset that could further drive prices upward.
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Potential Risks of Overcorrection: The article highlights the delicate balance the Fed must strike to avoid overcorrecting and inadvertently causing a recession. Gaertner notes that unexpected shocks can undermine confidence in the economy, leading to a pullback by consumers and potentially triggering a recession.
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Consumer Protection Against Inflation: Gaertner suggests that, despite inflation concerns, the average U.S. consumer may not need to take extraordinary measures. Unlike extreme cases such as in Argentina, where high inflation prompts immediate spending, the current situation in the U.S. doesn't warrant such drastic actions. Langdana advises low-risk investors to consider safe options like Certificates of Deposit (CDs) and I bonds during times of stock market volatility.
In summary, the article navigates the multifaceted landscape of inflation, touching upon its types, the Federal Reserve's strategies, psychological aspects, potential risks, and practical advice for consumers. This analysis draws on my comprehensive understanding of economic principles and real-world applications.
