Inflation Crisis

By Everton Prospere

Volume 2 Issue 3

January 14, 2022

Inflation Crisis

Image provided by AZ Central

The COVID-19 pandemic brought an unforeseen crisis along with the deadly disease, inflation. Inflation, which is the increase in prices with a decrease in the purchasing value of money, has existed as a major problem in the United States (U.S.) since the formation of the country. However, economists have generally controlled the issue, predicting inflating prices and acting appropriately. With the pandemic though, the economy has spiraled out of control, with inflation reaching all-time highs.

According to Investopedia, a financial website based in the U.S., inflation primarily occurs from “an increase in production costs or an increase in demand for products and services.” In economic terms, demand-pull inflation is the increase in demand by consumers and, in turn, the price of a specific product. Cost-push inflation is the smaller supply and higher price of a product because of an increase in the price of a key resource. These terms are important, as both demand and resources play a role in the history of inflation in the U.S. For example, in the 1970s, the U.S. experienced heavy inflation due to a limited amount of oil available in the U.S. As per the Federal Reserve, the low supply of oil is attributed to President Nixon’s and the U.S.’s support of Israel in the Fourth Arab-Israeli War. The Middle East supplies a high amount of oil to the world; therefore, these countries - such as Saudi Arabia and Libya - formed a group known as the Organization of Arab Petroleum Exporting Countries (OAPEC) to control and protect the economic oil activities of these nations as a united force. OAPEC then punished the U.S., along with several other supporters of Israel, by creating an oil embargo, which stopped oil exports to the nations targeted. The demand by consumers that followed stimulated high oil prices, as not enough of the resource was available to offer the growing vehicle industry in the U.S. In addition, due to the high oil prices and the other areas of the economy adversely affected, money also lost much of its value, as one could not pay the same amount for oil as paid for before the crisis. Evidently, inflation has shown its impact before in the U.S.

While both demand and key resources played a role in the 1970s oil crisis, the current situation is largely attributed to demand. Jeanna Smialek of The New York Times reports that the pandemic has caused many supply chain issues, such as the clogging of shipping routes. However, the cause also lies in consumers; as she states, “consumers, who collectively built-up big savings thanks to months in lockdown and repeated government stimulus checks, are spending robustly and their demand is driving part of the inflation.” According to the Bureau of Labor and the consumer price index, inflation is currently at 6.8%, meaning prices increased by that percentage. This number, almost a 40 year high, is completely off course from the federal target of 2%. While this significant number continues to be monitored, it remains far from the 1970s, when the U.S. experienced inflation rates of over 10%. However, the current 6.8% shows a dangerous upward trend, inching closer and closer to record levels of inflation.

Overall, the U.S. has continued to act as a world leader economically. Compared to Turkey - which, according to the BBC, has inflation rates of upwards of 36% - the U.S. has controlled the pandemic and its inflation rates successfully. However, until the pandemic’s negative effects end, Americans will continue to see high inflation rates.