{"id":11489,"date":"2021-12-06T15:01:14","date_gmt":"2021-12-06T21:01:14","guid":{"rendered":"http:\/\/blog.uwsp.edu\/cps\/?p=11489"},"modified":"2021-12-06T15:03:42","modified_gmt":"2021-12-06T21:03:42","slug":"the-u-s-economy-like-nothing-that-youve-seen-part-3-inflation","status":"publish","type":"post","link":"https:\/\/blog.uwsp.edu\/cps\/2021\/12\/06\/the-u-s-economy-like-nothing-that-youve-seen-part-3-inflation\/","title":{"rendered":"The U.S. Economy: Like Nothing That You\u2019ve Seen Part 3\u2013Inflation"},"content":{"rendered":"\n
\"The<\/figure>\n\n\n\n

Inflation Overview<\/strong><\/h2>\n\n\n\n

There are two broad factors that affect prices \u2013 supply and demand. Generally, inflation is caused when there is a change to one<\/em> of these factors. If the supply of goods is reduced for a given demand, prices (inflation) will increase until a higher price level is reached that balances the demand to match the reduced supply. If the demand for goods is increased for a given supply, prices (inflation) will increase until a higher price level is reached that balances the supply of goods to match the increased demand. <\/p>\n\n\n\n

The chart below shows the 12-month\nchange in the Consumer Price Index (CPI) over the past ten years. The change in\nthe CPI is used to measure the rate of inflation, which is the percentage\nchange in prices. Generally, the rate of inflation varied between 1% and 3%\nover the past decade, although the rate approached 4% in late 2011 as the\neconomy rebounded following the financial crisis. After a January 2012 rate of\n3.0%, inflation remained below 3.0% through 2020. In 2020, inflation dipped\nbelow 1% due to the severe economic contraction caused by COVID.<\/p>\n\n\n\n

12-month Percent Change in CPI for all Urban\nConsumers, October 2011 \u2013 October 2021<\/strong><\/p>\n\n\n\n

\"12-month
Source: U.S. Bureau of Labor Statistics and Federal Reserve Economic Database<\/em><\/figcaption><\/figure>\n\n\n\n

The chart below focuses on the rate\nof inflation between October 2020 and October 2021. Things changed in 2021. In\n2021, inflation began the year at only 1.4%, but by October inflation jumped to\n6.2%, a 4.8% increase. The effect of COVID on the economy created a collage of\nfactors that contributed to a highly unusual jump in inflation. <\/p>\n\n\n\n

The Bureau of Labor Statistics\nprovides monthly data since 1948 on the 12-month percent change in the rate of\ninflation. The 4.8% increase that occurred between January and October of 2021 was\nthe second largest increase in inflation that occurred in any year since 1948. The\noil embargo and energy crisis in 1973 contributed to the largest increase in\ninflation in any year, as inflation rose from 3.6% to 8.9%, a jump of 5.3%. Both\n1973 and 2021 featured \u201csupply shocks\u201d to the U.S. economy. Energy prices rose\nsharply in each case, but supply chain interruptions extended beyond energy in\n2021. The novelty for the U.S. economy in 2021 \u2013 inflation was caused by\nchanges in both<\/em> supply and demand. <\/p>\n\n\n\n

12-month Percent Change in CPI for all Urban\nConsumers, October 2020 \u2013 October 2021<\/strong><\/p>\n\n\n\n

\"12-month
Source: U.S. Bureau of Labor Statistics<\/em><\/figcaption><\/figure>\n\n\n\n

There is no question that the\nshort-term pain created by the significant increase in inflation is real to\nU.S. consumers. Although the effect on consumers has been painful, corporate\nprofits have been at record levels, indicating that increased corporate costs\nhave generally been more than offset by price increases passed through to\nconsumers. The graph below indicates quarterly corporate profits over the past\n10 years. Second quarter 2021 corporate profits reached a record $2.7 trillion,\nsurpassing the previous record of $2.4 trillion which was set in the first\nquarter of 2021. Corporate profits have increased approximately 30% from their\npre-COVID highs in 2018.<\/p>\n\n\n\n

Corporate Profits After Taxes (2011\nQ2 \u2013 2021 Q2)<\/strong><\/p>\n\n\n\n

\"Corporate
Source: Federal Reserve Economic Database and U.S. Bureau of Economic Analysis<\/em><\/figcaption><\/figure>\n\n\n\n

Inflation Factors<\/strong><\/h2>\n\n\n\n

A myriad of factors contributed to\nthe recent spike in U.S. inflation. COVID impacted the two broad factors that\naffect prices \u2013 supply and demand. Price increases have been broad, affecting a\nwide variety of consumer products. Listed below are the price increases for\nselected product categories that had some of the largest price increases for\nthe 12 months ending October 2021. <\/p>\n\n\n\n

12- Month Change in Prices \u2013\nOctober 2020 to October 2021<\/strong><\/p>\n\n\n\n

\"12-
Source: U.S. Bureau of Labor Statistics<\/em><\/figcaption><\/figure>\n\n\n\n

While COVID was the driving force in creating demand and supply imbalances in not only the U.S. but also globally, COVID also magnified other issues that contributed to inflation. Although COVID was the driving force behind inflation, there wasn\u2019t just one factor causing inflation. Depending on the product, price increases were caused by different factors.<\/p>\n\n\n\n

Global Economic Recovery<\/h4>\n\n\n\n

On the demand side, COVID caused a\nglobal economic contraction in 2020. In 2021, it\u2019s not just the U.S. economy\nthat is recovering, it\u2019s also the global economy. According to the\nInternational Monetary Fund (IMF), in late 2021 the global economic recovery\ncontinues amid a resurging pandemic with unique policy challenges. After\ndeclining 3.1% in 2020, global GDP is expected to increase 6.0% in 2022 and\n4.9% on 2023. That dramatic reversal in economic growth increases the demand\nfor products and services globally (including energy) and strains pandemic\naffected supply chains.<\/p>\n\n\n\n

Energy Prices<\/h4>\n\n\n\n

The strong rebound in global\neconomic growth contributed to a significant rise in energy prices. And when\nenergy prices increase, prices of almost everything will increase. Almost\neverything you buy gets delivered by a truck. And it\u2019s not just the United\nStates facing increased energy costs, it\u2019s global. According to the IMF, as of\nlate October 2021, \u201cspot prices for natural gas have more than quadrupled to\nrecord levels in Europe and Asia, and the persistence and global dimension of\nthese price spikes are unprecedented\u201d. Brent crude oil prices, the global\nbenchmark, recently reached a seven-year high and quadrupled in 2021 relative\nto 2020.  Overall, U.S. energy prices\nincreased 30 percent between October 2020 and October 2021, with gasoline\nprices increasing 49.6% and natural gas increasing 28.1%.<\/p>\n\n\n\n

2021 featured a global imbalance of\ndemand and supply in the energy sector. The impact of COVID globally caused a\ncollapse of energy consumption in 2020, leading energy companies to cut investments\nand supplies. However, consumption of natural gas rebounded fast with the\nglobal economy. Industrial production accounts for about 20 percent of final\nnatural gas consumption, and the economic rebound boosted demand at a time when\nsupplies were relatively low. Energy supply has also been impacted by weather,\nlabor shortages, maintenance backlogs, and infrastructure issues. <\/p>\n\n\n\n

Supply Chain <\/h4>\n\n\n\n

COVID also magnified other issues\nthat contributed to inflation. World-wide demand for semiconductors grew significantly 2020\nand 2021, as sales of consumer electronics ramped up and new technologies\ndeveloped in the auto industry. However, the bulk of semiconductors are\nproduced in Asia, including Taiwan, South Korea, China, and Vietnam. Supply\nchain issues, including the impact of COVID on the supply chain, contributed to\na semiconductor shortage in 2021, particularly in the automotive industry. The\nshortage of semiconductors contributed to a stunning 26.4% increase in used car\nprices and 9.4% increase for new cars. According to the Semiconductor Industry\nAssociation, the U.S. share of global semiconductor manufacturing\ncapacity has declined from 37% in 1990 to just 12% today. The drop in U.S.\nglobal semiconductor manufacturing capacity exacerbates COVID related sourcing\nproblems.<\/p>\n\n\n\n

In the United States, the ramp-up\nin consumer demand for imported goods as the economy expanded, combined with\ninfrastructure problems at ports and railways, and labor shortages, contributed\nto supply chain problems. Imports of sporting goods, particularly bikes, and furniture\nare heavily relied on by U.S. consumers. Imports were impacted by COVID related\nsupply chain issues not only in the U.S. but also in the foreign sourced\ncountry. Sporting goods prices (including bikes) increased 8.4% and furniture\nand bedding prices rose 12.6% for the 12-month period ended October 2021.<\/p>\n\n\n\n

A myriad of factors contributed to a\nrise in food prices. Rising energy prices affect transportation and feed costs.\nCOVID has created labor shortages which in turn affect product availability and\nsupply chain issues. Unfavorable weather has also been a factor. For the\n12-month period ended October 2021, food prices increased 5.3%, with meats,\npoultry, and fish up 11.9%.<\/p>\n\n\n\n

Pent-Up Demand<\/h4>\n\n\n\n

Pent-up demand for travel and a\nCOVID decline contributed to soaring prices in 2021 for lodging away from home,\nwhich saw a price increase of 22.8%, and car and truck rental prices, which\nincreased 39.1%. Car and truck rental prices were also impacted by the\nsemiconductor shortage, which impacted the prices and availability of new and\nused cars. <\/p>\n\n\n\n

Although the demand and supply\nimbalances created by COVID that led to inflation are expected to subside,\nthere will likely be some lasting effects. Inflation created by COVID magnified\nother problems, such as supply chain issues and offshore sourcing, infrastructure\nproblems, labor market issues, global energy reliance on oil and natural gas,\nand in some cases, inventory management. Each of these areas has problems that\nalthough exacerbated by COVID, are not because of COVID. Changes will likely be\nmade.  <\/p>\n\n\n\n

Conclusion<\/strong><\/h2>\n\n\n\n

What a ride. Since early 2020, the\nCOVID driven economy created unprecedented ups and downs in economic growth, employment,\njob openings, the quit rate, workers leaving the workforce, and inflation. Supply\nchain issues, including infrastructure problems and offshore sourcing, were not\ncreated by COVID, but the economic impacts of COVID magnified supply chain\nproblems. Economic volatility began in 2020 with the dramatic, sudden negative\neconomic impacts of COVID. Economic volatility continued as multiple fiscal and\nmonetary responses reversed the negative economic effects of COVID, but new\nproblems such as inflation and supply chain issues appeared in 2021. The\nuniqueness of the pandemic and unprecedented fiscal and monetary responses\ncombined to create new challenges for businesses and policymakers.<\/p>\n\n\n\n

As the U.S. and world get ready for\n2022, the effects of COVID on the global economy continue. The greater the\nprevalence of COVID in 2022, the greater the negative economic effects. The\nimpact of COVID was and remains global; countries are connected economically.  Hopefully in 2022, the unprecedented economic\nvolatility and negative effects caused by the virus dissipate. Supply chain\nissues should improve as the impact of COVID on global economies is reduced and\ninfrastructure is improved. Demand and supply should become balanced as\neconomic growth stabilizes and supply irregularities resolved, leading to\nreduced inflation and stabilization in the labor market. Some of the economic\nimpacts of COVID will likely remain. Businesses may rethink supply chains and\noffshore sourcing. Infrastructure problems need to be resolved. Given the steep\nrise in energy prices, energy sourcing may be reconsidered. The labor market\nhas changed, and increased flexibility and employment options for workers will\nlikely remain in a growing economy. COVID created unprecedented economic\nchallenges; meeting the challenges will allow the U.S. to emerge as a stronger\nglobal economic leader.<\/p>\n\n\n\n

For\nfurther information:<\/h4>\n\n\n\n
  1. Info on historical inflation from the Federal Reserve Economic Database (FRED): FRED Database – Inflation<\/a><\/li>
  2. Information on the recent CPI from the U.S. Bureau of Labor Statistics<\/a> <\/li>
  3. Info on product inflation from the U.S. Bureau of Labor Statistics<\/a><\/li>
  4. Federal Reserve Economic Data (FRED) for oil prices:
    1. Oil Prices – U.S.<\/a><\/li>
    2. Global Oil Prices – Brent Crude<\/a><\/li><\/ol><\/li>
    3. From the U.S. Energy Information Administration: Gas Prices<\/a><\/li>
    4. From the U.S. Treasury: The Yield Curve<\/a><\/li>
    5. From the Federal Reserve: Corporate Profits<\/a><\/li><\/ol>\n\n\n\n
      \"Kevin<\/figure>
      \n

      Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight<\/a> in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point. <\/p>\n<\/div><\/div>\n\n\n\n

      \"The<\/figure><\/div>\n\n\n\n

      CBEI Series: The U.S. Economy: Like Nothing That You\u2019ve Seen<\/strong>
      Part 1: Economic Growth<\/a>
      Part 2: Labor Market<\/a>
      Part 3: Inflation<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

      Inflation Overview There are two broad factors that affect prices \u2013 supply and demand. Generally, inflation is caused when there is a change to one of these factors. If the supply of goods is reduced for a given demand, prices (inflation) will increase until a higher price level is reached that balances the demand to […]<\/p>\n","protected":false},"author":136,"featured_media":11469,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2,7,527],"tags":[532,305,343,344],"_links":{"self":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/11489"}],"collection":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/users\/136"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/comments?post=11489"}],"version-history":[{"count":3,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/11489\/revisions"}],"predecessor-version":[{"id":11500,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/11489\/revisions\/11500"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media\/11469"}],"wp:attachment":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media?parent=11489"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/categories?post=11489"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/tags?post=11489"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}