What you need to know about inflation

Valeria Ruiz thought things would be different for her, she thought the choices she had made had put her on another path.

Growing up in Reading she learned how it felt to live life under the constraint of a tight budget. Her mother worked hard to support Ruiz and her siblings, but often found herself just scraping by paycheck to paycheck.

Ruiz believed that wouldn’t be the case for her.

She and her husband, Francisco Hernandez, both have good-paying jobs. She’s a nurse at Reading Hospital, and he works at East Penn Manufacturing Co. Inc.

The couple were able to buy a house in Wernersville about a year ago. They’ve been able to care for a pair of dogs.

Francisco Hernandez and his wife, Valeria Ruiz, are making changes to deal with inflation. (COURTESY OF VALERIA RUIZ)

And on Friday nights, they would forgo toiling away in the kitchen and instead head out to a local restaurant for a nice meal.

But over the last 12 months, things have changed.

“I started to notice it when I’d go to the grocery store,” Ruiz said. “I’d usually spend about $150 a week on food shopping. But now I’m spending over $200 for the same amount of food.”

The 29-year-old Ruiz is like many Americans, struggling to deal with the rising costs brought on by inflation. For her, it has placed her in a familiar, unwanted situation.

“It sounds sad, but it feels like we’re living paycheck to paycheck,” she said. “We have a good income, but everything has gone up. It kind of feels like we’re going backwards a little bit.”

Ruiz said the inflation that has raised the prices of pretty much everything by more than 7% over where they were this time last year has made her and her husband change how they live.

When she goes to the grocery store now, it’s with an eye on deals. She’s started to pass over brand names — which she used to choose because she felt they were better quality — and instead pick up store brand products.

“We kind of have to pinch on some things and not get what we used to,” she said.

She has also started using coupons and, when she can, buying items in bulk to save a few cents. And more and more she has started shopping at discount grocery stores.

Those Friday night dinners have also been impacted.

“We’re not able to splurge on the things we used to,” she said. “We probably only go out to dinner once a month now, if that. And when we do we don’t even go somewhere nice, just fast food.”

Ruiz said the financial impact she’s feeling from inflation has even impacted her plans for the future. She said she’s been trying to save money with an eye on having children, but that’s proved difficult.

“That’s something that’s not really in our books right now,” she said. “I don’t know how people with kids are doing it.”

But the worst part about dealing with inflation, the part that bothers her the most, is that she has had to cut back on the help she had been providing to her ailing mother.

“I had been helping my mom with her bills. I can’t do that anymore,” she said. “She’s by herself and has kidney failure.”

Ruiz’s story is not unique. Millions of Americans find themselves in similar situations, looking for ways to deal with the pressures of inflation.

Some have fared better, others much worse.

It’s a topic that has dominated news cycles and conversations for months. It’s also a complicated one that many Americans might not fully understand.

To help with that, MediaNews Group spoke with three local experts who helped lay out some of the basics about inflation.

What is inflation?

Put as simply as possible, inflation is when things cost more.

“Most people will understand that inflation represents an increase in prices,” said Dr. Andy Economopoulo, a professor of business and economics at Ursinus College in Montgomery County.

But that increase isn’t just for one or a small handful of products, he added.

“It’s not happening with one particular commodity, but with multiple commodities,” he explained.

Dr. Andy EconomopouloDr. Andy Economopoulo

Economopoulo said inflation involved a broad-based groups of goods — referred to as a market basket — rising in price. That includes things like food, clothing, fuel, medical supplies, entertainment and luxury items.

“The government calculates how much all of those items cost each month, and when the cost of the basket increases you have inflation,” he said.

Inflation is usually tracked by looking at what is called the consumer price index (CPI). The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

CPI increases are reported month to month and year to year. According to the most recent data, CPI increased 0.4% in October and 7.7% over the last 12 months.

That 7.7% annual increase is the number most commonly reported as the inflation rate.

Economists also look at something called the producer price index (PPI), which measures inflation from the perspective of costs to industry or producers of products. When it costs more to produce goods, it typically follows that it will cost consumers more to purchase them.

Earlier this year PPI hit an all-time high in the U.S.

What causes inflation?

There’s both a simple and complex answer to the question of what causes inflation.

Sudip Ghosh, an associate professor of business at Penn State Berks, said inflation occurs when supply and demand are misaligned.

Essentially, he said, it happens when demand is outpacing supply. When there isn’t enough product available to meet the number of people who want to buy it, the cost of the product goes up.

That’s the simple part. Where things get complex is when you look at the factors that cause the misalignment of supply and demand.

It could be because, for one reason or another, demand suddenly increases. That happens when there is an increase in spending by consumers, businesses or government.

Experts say that prices across the board, including gasoline, are levelling off but don't expect them to return to levels of the pre-inflationary period. (MARTA LAVANDIER - THE ASSOCIATED PRESS)Experts say that prices across the board, including gasoline, are leveling off but don’t expect them to return to levels of the pre-inflationary period. (MARTA LAVANDIER – THE ASSOCIATED PRESS)

It could also be because supply falls. That might occur because of things like a shortage of raw materials, supply chain breaks or labor shortages.

Sometimes it happens because people or businesses think prices are going to go up in the future. This could lead businesses to raise their prices prematurely or for workers to demand raises to account for the expected increase.

In the current situation, it appears all three of those things happened.

“We had the perfect storm,” Economopoulo said.

Much of that is because of the COVID pandemic.

James Wilkinson, an assistant professor of finance at Neumann University in Delaware County, said the U.S. was actually struggling to keep CPI up before the pandemic.

The Federal Reserve — which is tasked with controlling the country’s monetary system — likes to keep CPI around 2% in order to keep the economy moving, Wilkinson said. But between January and March of 2020 it was dipping as low as 1.4%.

“Then COVID hit,” Wilkinson said.

James WilkinsonJames Wilkinson

The global pandemic caused businesses around the world to slow down or completely shutter, which wreaked havoc on supply chains. Most people can remember the sight of largely empty shelves at grocery stores that was the result.

That meant the precious few goods that could find their way through the supply chain were suddenly much more valuable and costly.

Ghosh said a friend of his who imports electronics from China is paying four times as much now for containers than he did before the pandemic. That increase, of course, gets passed along to consumers.

Free money contributes?

While supplies were at their slimmest, Wilkinson said, the U.S. government took an action that fanned the flames.

It began dispersing stimulus checks to the public, a move was made to ease the impact of widespread job losses caused by COVID.

Wilkinson said stimulus checks were probably a good idea in general — he said he can’t imagine what would have happened to the economy without them — but he doesn’t believe the program was handled efficiently.

“I didn’t lose a day of work during COVID, but I got stimulus checks,” he said. “The government was pumping money into people’s pockets.”

People in the same boat suddenly found themselves with extra cash, Wilkinson said, but not enough products to buy.

“You had too many dollars chasing too few goods,” he said.

And because the government didn’t raise taxes to cover the expense of stimulus checks, Economopoulo said, it had to finance it by borrowing money.

The Federal Reserve bought that debt from the Treasury Department, which essentially meant the government was creating new money that was pumped into a system already struggling to meet the demand of existing dollars.

Spiraling wages

While the supply chain issue and stimulus check issues appear to be transitory — meaning temporary challenges that eventually work themselves out — Wilkinson said a third factor might stick around: labor inflation.

Companies across the U.S. have been desperate to find workers ever since the country began reopening from the pandemic. That has led to increased competition that has pushed up wages.

“We’ve all seen the signs at Wawa and Sheetz offering $17 an hour,” Wilkinson said.

Employers are paying more for workers and passing the expense along to customers. (COURTESY PHOYO)Employers are paying more for workers and passing the expense along to customers. (COURTESY PHOTO)

Those higher wages mean higher costs for businesses, which in turn leads to increased prices for consumers.

On top of the pandemic impacts on the economy, another world event is also influencing inflation.

Russia’s invasion of Ukraine, and the resulting ongoing war, has had a major impact on the price of oil and grains.

European nations have felt a particularly harsh sting from a ban on imports of Russian oil.

“Things are even tighter in Europe,” Ghosh said. “U.S. inflation is bad, but if you look at inflation in the U.K., it’s over 11%. It’s mostly energy driven in Europe because of their reliance on Russian oil and gas.”

And many other countries across the world are being hit hard by decreases in grains from Ukraine.

With the world’s economy as entwined as it is today, those struggles ultimately end up impacting the U.S.

How do you fight inflation?

There are three ways that a government can fight inflation.

The one that is being pursued now in the U.S. is the Federal Reserve raising interest rates. That makes borrowing money more expensive, which will likely cool off the economy.

“The Fed is raising interest rates and that is already having and impact on the housing market and will likely slow consumer spending,” Economopoulo said. “That will eventually slow inflation.”

Basically, people are less likely to borrow money to buy big-ticket items like houses or cars or boats when they’re being charged high interest rates. And businesses are less likely to borrow money to develop new products or expand their current size.

Banks are also less likely to want to lend money, Ghosh said, because they’re getting paid high amounts of interest from the Federal Reserve on the money they have stashed.

The Fed’s current rate of 4% is only high in terms of the post-Great Recession period.

Economopoulo said there are two other steps that government can take, but said he doubts the U.S. will pursue either one.

The first is raising taxes, and the second is for the government to decrease its spending.

“Under our current political climate you’re not going to get either of those,” he said.

Wilkinson said that he thinks it’s very unlikely that federal taxes will be increased, but was more optimistic about government spending. He said history has shown that when the two major parties — Republicans and Democrats — share power as they will starting in 2023, it can lead to stalemates that end up impacting spending.

“Divided government can slow spending down,” he said.

How long will inflation last?

All three local experts have optimism about the trajectory of the U.S. economy.

“I think we’re near the peak because I think we are seeing major supply chain issues easing and you have gas prices stabilizing,” Economopoulo said.

Economopoulo said month-to-month inflation rates have been getting smaller, which indicates things are moving in the right direction. He warned, however, that consumers shouldn’t expect the costs of goods to suddenly drop.

“People need to recognize that goods on the shelf won’t go back down to what they used to be,” he said.

Instead, consumers can expect to see prices level out instead of increasing.

Wilkinson said the projections he’s seen show that 2023 should be better than 2022.

“The good news is that it does seem to be dissipating a little bit, and the projection is that next year it should come down a bit more,” he said of inflation.

Likewise, Ghosh said things are looking more positive every day.

“We’ve actually turned the corner,” he said.

Sudip GhoshSudip Ghosh

All three, however, were reticent to make predictions of what will happen on the other side of the inflationary period. Many times throughout history the end of inflation has led to recessions.

Wilkinson said one positive factor that could indicate a severe recession is not on the way is the labor market.

“You usually don’t have so many job openings heading into a recession,” he said.

Still, all three experts agreed, only time will tell if the U.S. has a soft or harsh landing.

Tips for dealing with inflation

Regardless of what caused the current inflation or what’s being done to combat it, consumers are forced to deal with it.

And, as Ruiz pointed out, that can be difficult.

The way she’s handling it reflects advice the local experts gave for how to get through the challenges of inflation.

“The best way to deal with it, and people probably don’t want to hear this, is to spend less,” Economopoulo said. “Look for sale items, move to lesser quality goods. That’s how you would manage under these circumstances.”

Economopoulo also said people should look to put off big purchases, if they can.

Wilkinson also encouraged people to trim their spending, adding the worst mistake someone can make is going into debt at a time like this.

“What scares me is the amount of people that are living off their credit card right now,” he said. “Credit card debt is through the roof. And that’s a day of reckoning coming.”

Wilkinson said he has watched a video about how millionaires tend to live, and said their practices are ones that people might want to follow to help deal with inflation.

He said most cut coupons, shop sales and don’t often go out to eat.

“Manage your budget,” he said. “Do you need a new car or can you wait a little? They’re forecasting prices will drop next year.

“And, please, don’t live off your credit cards.”

Ghosh shared almost identical advice.

“I tell people they have to be conservative with saving money, don’t be reckless when you get money,”  he said. “Only use it where it’s absolutely necessary. Instead of buying a fancy lamp, you can hold off on buying the fancy lamp until next year.”

Ghosh also stressed the importance of planning.

“Be careful, see how far your money goes and be mindful of how you spend your money,” he said. “And have a budget in place.”

Inflation tips

Simple things to do to minimize the impact of inflation in your life:

• Spend less

• Put off big purchases

• Lay off the credit cards

• Cut coupons

• Shop sales

• Make a budget and stick to it

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