In the first half of the superhero movie Justice League, Batman warns Wonder Woman that he believes an attack is coming. In reply, Wonder Woman says, “Not coming, Bruce. It’s already here.”
The same is now true with inflation. For months, economists have been warning that the federal government’s rapid creation of money out of thin air, coupled with pent up consumer demand following the COVID-19 Recession, would cause a spike in inflation.
That spike is already here.
On Thursday, the U.S. Bureau of Labor Statistics (BLS) reported that the year-over-year increase in inflation in May reached a level not seen since the Great Recession of 2008.
“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in May on a seasonally adjusted basis after rising 0.8 percent in April,” BLS reported.
“Over the last 12 months, the all items index increased 5.0 percent before seasonal adjustment; this was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008,” it added.
Inflation is the “decline of purchasing power of a given currency over time … The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”
In other words, inflation occurs when producers and distributors begin to charge higher prices for the same product, which means the value of the currency is reduced.
As one consequence, higher inflation punishes those who have saved their money, since their dollars are no longer worth as much as when they were originally saved.
For example, over the past few decades, inflation in the United States has averaged around 2% per year. If someone had $10,000 in their savings account in 2011, its value would decrease by 20% in 10 years, meaning that $10,000 would really be worth only $8,000 in 2021.
The higher the inflation rate rises, the more troublesome it becomes.
So, what does this mean for your family?
As a practical matter, it means families should prepare to pay higher prices for a wide range of products.
The BLS reported on Thursday that food prices increased by 2.2% year-over-year in May.
Additionally, energy prices surged by 28.5% in May from the same time in 2020 while the price of gasoline shot up 56.2% compared to the same point in 2020.
Used car prices rose 29.7% and the price of apparel rose by 5.6% from May 2020 to May 2021.
Clearly, the inflation many economists were warning about last year has arrived.
While some economists expect the rise of inflation to be transitory, others expect it to stick around for a long time.
Economists at Deutsche Bank are warning that the global economy is in deep trouble. “We worry that inflation will make a comeback,” the economists wrote in a paper published on June 7.
“Few still remember how our societies and economies were threatened by high inflation 50 years ago… It may take a year longer until 2023 but inflation will re-emerge … neglecting inflation leaves global economies sitting on a time bomb.”
Of note, the year-over-year increase in prices has risen every month since January. In the first month of 2021, the CPI increased by 1.4% year-over-year. In February, that increase rose to 1.7%. In March, consumer prices rose 2.6% since the same month in 2020. The CPI then rose by 4.2% in April, followed by a 5% year-over-year increase in May.
If current trends hold, could we see a double-digit year-over-year increase within the next year?
According to one economist, the answer is yes.
“How much inflation? On that question, the crystal ball is still clouded. But if you asked me for a guess, I’d say low double digits in the United States by the first months of 2022,” the economist predicted in April 2020.
Now that inflation has arrived, the two most important questions are:
How high will the inflation rate go?
How long will it last?
The answer to these two questions will determine how much of a pinch American families will feel in their wallets over the coming months.
You can follow this author on Parler @ZacharyMettler
Photo from Shutterstock
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