Inflation! Is there Cause for Concern?

The July interest rates report sparked concerns about soaring prices and an overheated economy. However, according to Labor Department data, the majority of the increase can be attributed to just three factors: housing, used automobiles, and gasoline.

In July 2021, both used automobiles and vehicle fuel were 42 percent more costly than they were the previous year at the same time. Housing expenses increased by only three percent, but they had a significant impact on top-line figures. Considering shelter is so important, the administration’s experts give it a higher priority when assessing consumer prices.

The Labor Board believes that costs have increased by 5 percent in the last year

The rapid rise in inflation is reinvigorating old anxieties on Capitol Hill. Fears about hyperinflation have been disregarded, according to Sen. Chuck Grassley, who made the statement earlier this year as worries about price rises began to surface. For those who lived through the 1970s economic stagnation, this sounds awfully familiar.

However, this price increase is not comparable to what occurred in the United States in the 1970s, when prices increased by an average of 7% a year for more than a decade. Energy was a driving factor in that spell of inflation, with abrupt drops in imported oil rising fuel prices, and inflationary pressures.

Inflation was also more evenly distributed across the industry in 1970, with food, housing, transport, and hospital attention all exceeding 5%. Only transportation accounts for more than 5% of these sectors now.

Analysts believe the current bout of inflation is caused by a mix of pent-up consumer demand and supply system constraints, both of which have been worsened by the epidemic.

Individuals are interested in spending on products and services, bolstered by economic savings and stimulus funds. Simultaneously, certain sectors have been hesitant to ramp up output, resulting in higher pricing for limited supplies.

According to Marshall Reinsdorf, a retired top analyst in the IMF Statistics Department, a considerable proportion of government salaries didn’t actually decrease, but they were prohibited from spending it as they would have otherwise. Forcing people to save could be contributing to the surplus demand.

We Can Look to History for the Answer

A better analogy would be the end of WWII, when the need swiftly rebounded to prewar rates and production struggled to keep up. Americans breathed a sigh of relief once the war ended and rushed out to find products, food, and automobiles that had been considered luxuries only a year before.

Consumption outstripped supply, and hyperinflation soared from 4% to over 20% in less than a year. Inflation began to fall in 1948 as manufacturers resumed normal production rates.Experts predict that price increases for products like secondhand vehicles would be temporary, much as hyperinflation was after WWII.

During the pandemic last year, many rental car firms reduced inventory, stifling the typical flow of rental automobiles to a used automotive market. Inflation will slow when markets begin to recover. Indeed, during March and May, used automobile prices increased by an average of 9% per month, but only by 1% in June.