Economists break down why consumer prices are so high right now.
As inflation tightens its grip on the economy, the Federal Reserve has begun walking back previous assurances that it will be a temporary, post-pandemic blip. Economists at Goldman Sachs warned in a research note last week that inflation is"likely to get worse before it gets better," and could persist well into next year.A person shops in the meat section of a grocery store on Nov. 11, 2021, in Los Angeles.
"Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services," the Fed states."Rather, inflation is a general increase in the overall price level of the goods and services in the economy." "When you have a higher demand, the price tends to go up. When you have lower supply, the price also tends to go up," Goldstein told ABC News."At the end of the day, the price is a combination of these forces."
Veldkamp also stressed the impact that the supply chain issues have on driving up prices. Using the Christmas sweaters metaphor again, Veldkamp added,"Let's say those Christmas sweaters are stuck on a boat somewhere, then the few sweaters that are here, lots of people want them."Costs of doing business have also risen during the pandemic, Veldkamp noted, as companies had to spend more to make it safe to do business while COVID-19 spread.
Goldstein reiterated that the effect of inflation on consumers is that"when prices go up, people will have to pay more for whatever they want, and as a result, they can afford less.""What could happen is everyone has to pay more, so they go back and start demanding increases in wages," he said.
Goldstein warns, however, that, once inflation starts rising, the Fed will have"no choice but to increase rates abruptly."What can the government do to reduce inflation? "So, if somebody hasn't already refinanced their mortgage, now would be the time to do that," she added."We will probably see the Federal Reserve boost interest rates, because that's their primary tool to constrain inflation, and what that does is it encourages people to save their money.
"If fixing the potholes means that fewer delivery trucks are blowing out tires and things get to where they need to go on time -- things run more smoothly," she added."If they can reduce the cost of doing business, they can bring down inflation.""When you are dealing with inflation, you have to think about how you protect your investments," Goldstein said.
Powell said that"the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, specifically the effects on supply and demand from the shutdown, the uneven reopening and the ongoing effects of the virus itself" and stressed that the Fed's tools"cannot ease supply constraints."