Inflation rate affecting more than gas prices
The national gas price average recently hit $4.104 per gallon, setting a record and beating out the 2008 high of $4.103, according to an article from The Hill.
This peak in gas prices comes as the inflation rate nears 8% – rates not seen since the early 1980’s – professor of economics and finance at USU Dr. James Feigenbaum said.
In simple terms, inflation means that the value of the dollar is decreasing. A $1 bill yesterday has less buying power than that same $1 dollar bill today, seen by generally higher prices of goods and services.
Lexi Sutton, a Utah State University senior, shared, “With the recent uncontrolled inflation, I’m wary to go buy and do things,” Utah State University senior Lexi Sutton said. “I’ve been minimizing my grocery shopping and my driving so I don’t have to spend money on gas.”
Though normally the Economic Times reports the inflation rate is cyclic. Inflation tends to slightly rise and fall as people’s paychecks and spending fluctuate with company revenues.
Typically, the Federal Reserve, the governing body that creates monetary policy to keep the economy tame, shoots for an annual inflation rate of 2%.
“The Fed believes 2% is enough of a buffer between zero that there’s a very low probability that you would get deflation if you target an inflation rate of 2%,” said Feigenbaum.
Feigenbaum explained this rate of inflation inspires a manageable growth in the economy without letting it get too hot. He said it’s a “more threatening economic phenomenon than even double-digit inflation.”
To best measure inflation, the Fed uses what is called the Consumer Price Index.
“The government has identified a basket of goods that are necessities for most people, and calculates the price of that basket in different cities and averages that across the country and that’s how it determines the CPI,” Feigenbaum said.
Commodities included in this basket are items such as food, clothes and housing costs.
“When we say that the CPI rose by 8% from February 2021 to February 2022,” Feigenbaum said. “We’re saying that, for this basket of goods, the price increased by 8%.”
Inflation rates that exceed the desired 2% window are an indicator that the economy is overheating and that good and service prices are exceeding what consumers can typically pay for.
One of the primary reasons for the inflation spike is because of the skyrocketing federal budget.
Before the pandemic began, the federal budget was averaging in the neighborhood of $4 trillion to $4.5 trillion per fiscal year, as seen in a report from the Congressional Budget Office.
Over the pandemic, though, was various legislation, such as the Coronavirus Aid, Relief, and Economic Security Act, or CARES, pumped money into the economy by filling consumers’ pockets with money.
In the first year of the pandemic, the federal budget expanded to $6.6 billion dollars because of such programs, reaching an even higher $7.3 trillion in 2021.
With businesses’ doors closed and the public staying home, the unemployment and stimulus checks accumulated over the nearly two years the country faced the pandemic, and according to Feigenbaum, people’s savings hit unseen highs.
Combined with the growing federal budget was a 40% increase in the money supply during the pandemic, which is “the largest two year increase the Fed has ever made,” according to Feigenbaum.
Basically, the Fed bought nearly $6.4 trillion in securities which put even more cash into the economy.
When businesses began opening again, Americans were ready to spend those savings and buy everything they missed out on after two years of being locked inside.
The issue with this spending drive is that the market wasn’t ready for it because the supply wasn’t able to recover as fast as the demand for certain goods.
Particularly, computer chips for electronics, lumber for furniture, clothes and gas all faced huge supply chain breaks during the pandemic that have taken an especially long time to recover, according to USA Today.
With fewer products to buy but a larger population looking to buy them, the price of those products rose.
With cash flooding an economy not ready to handle it, the markets quickly overheated and created a sustained year-on-year inflation rate of nearly 8% as of February, Feigenbaum said.
While the Fed aims for a 2% inflation rate, it can’t directly set inflation rates. Instead, the Fed controls the interest rate.
“The interest rate that the Fed is actually targeting is what’s known as the federal funds rate, which is the rate that banks can borrow from each other overnight,” Feigenbaum said.
A smaller rate means more and larger loans to incentivize economic growth. Conversely, a higher rate discourages loaning for the consumer, meaning stymied economic development.
Recently, the Fed increased the federal funds rate by one increment — 0.25%.
Jerome Powell, the chair of the Fed, quoted in the Wall Street Journal, said the Board of Governors had penciled in several other quarterly increases to meet a 2% interest rate by the end of this year and 2.75% by the end of 2023.
“Especially without a job, I can’t be spending all of the money in the world. I have to do what I can to save as much money as possible,” Sutton said. “I wish that I didn’t have to care about inflation but, unfortunately, I do.”
Regardless of what is to come, USU students will have to bear with the high gas prices and costly bread for the time being, adding to the announced 3.5% tuition increase for next year.
-Michael.Popa@usu.edu
Featured photo by: Katie Henderson