PITTSBURGH — When it comes to your money, nothing is eating it up these days quite like inflation.
Channel 11′s Angie Moreschi takes a closer look at why inflation is happening now and how long we must endure this pain, in her latest Fact vs. Fiction report.
What can we expect?
We’re all feeling it. Whether it’s at the gas pump or grocery store, prices are up — a lot. The Consumer Price Index hit a 40-year high in March at 8.5%.
So, what exactly is inflation? It goes back to good old supply and demand. Inflation rises when there’s more money than goods and services available. So, you have more demand than supply, which drives up prices.
The latest CPI numbers show the price increase in multiple key areas from a year ago:
- Food prices are up nearly 9%.
- Gas prices are up nearly 50%.
- Used cars are up 35%.
- New cars are up 12.5%.
- Apparel are up 6.8%.
QUESTION: Have prices peaked?
We talked with Duquesne University Associate Professor of Economics Antony Davies to get some insight.
Davies: Have high prices peaked? I don’t think so. What’s more concerning now is that the pieces are in place for inflation to be long and persisting this time around. My knee-jerk reaction is we may be in this for several years.
ANSWER: Have prices peaked?
So no, Davies says it looks like there is no end in sight to price hikes, right now.
Which brings us to our next question.
QUESTION: Why is inflation happening now?
- Is it the war in Ukraine? Or as the Biden administration calls it, “Putin’s price hike.”
- Is it supply chain issues, which are continuing to gum up the production and delivery of products?
- Or is it too much COVID-19 stimulus money pumped into the economy?
Davies: In a lot of ways, it’s a perfect storm. The Ukraine war contributes, the supply chain problems contribute. I think the major driving factor is this fact that the federal reserve is printing money to fund the federal deficits. We’ve gone through a couple of years of multi trillion-dollar deficits. I think 2020 was over $6 trillion. Put that in perspective, that’s 50% more than the federal government spends in a single year. And that was on top of the federal government’s usual spending.
Angie: Did all the stimulus money contribute to this inflation, as well, with the government kind of pressing the accelerator just as the economy was beginning to bounce back?
Davies: It did. If there’s one thing that I could teach people about economics, it’s this there’s no such thing as a free lunch.
ANSWER: Why is inflation happening now?
Check, check, and check — the Ukraine war, supply chain issues, and stimulus money are all combining to drive up inflation.
So, the big question now is, what happens next?
QUESTION: Will this rising inflation lead to a recession? —which could be even worse.
Davies: Roughly speaking, recession is a contraction in the economy and the amount of stuff we’re producing. And it comes back to us in the form of things like unemployment. People are out of work, you go to the store, and there aren’t things there. That you need. There’s some general malaise of people looking at the future in the future looking bleak.
Angie: So, I know the big question now is will this rising inflation lead to a recession? What’s your take?
Davies: Under normal circumstances, I’d say yes, but I’m a little bit reticent to say that now, because the economy is coming off of COVID. We had everything locked down, and now we’re unlocking— the masks are going away, and the economy is starting to gin up again. And I think that that force of things coming back online is going to counteract what otherwise would be recessionary force.
Davies says he’s still optimistic the economy will grow in the months ahead, despite the surprise decrease in gross domestic product (GDP) reported last Friday. The GDP fell 1.4%, signaling a shrinking economy.
Davies: My latest take is that, if you dig into the numbers, the decline in GDP is driven more by Americans buying more foreign goods. That’s consistent with a story of the U.S. coming out of the COVID doldrums sooner than the rest of the world.
ANSWER: Will this rising inflation lead to a recession?
Bottom line: It’s still unclear. But Professor Davies does expect inflation to continue for at least the next year.
So, what can be done to prevent a recession?
QUESTION: Are raising interest rates the answer? –something the Federal Reserve has already started doing.
Davies: Yes, that’s a good thing, but we’ve got to keep in mind it’s addressing the symptom, it isn’t addressing the disease. The disease is what caused the increase in the money supply to begin with, and it’s that our politicians in Washington continually spend more money than they have.
ANSWER: Are raising interest rates the answer?
It’s still unclear whether rate hikes will work to stave off a recession, but it’s really one of the few tools the government has to at least try and control inflation.
Our next real measure of whether it’s working will be revealed next week on May 11, when the April inflation numbers are expected to come out. So, we’ll be watching to see if they go up again or level off.
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