Inflation in the USA: What is it, why is it growing, and what can be done about it

What is Inflation?

Inflation is a general price increase of goods and services gradually over time. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product. This temporarily increases the relative cost of living.

So what’s going on with inflation in the USA?

In short, it’s supply and demand.

A stronger economy generates inflation. The more people there are buying goods, the higher the demand on goods. Usually, companies meet that increasing demand by increasing the supply of goods.

During the Covid-19 pandemic, most businesses needed to reduce their services and orders for goods — on, say, semiconductor chips used for cars or waiting staff for their restaurant — and that led to some supply shortfalls that still linger today.

Now, as the United States - and the world - is opened back up and people are spending money again, the US demand for goods is skyrocketing: Inflation-adjusted retail spending in April was up 1.6% from April 2022. This is great news. Since the roll-out of vaccines, the US economy has been growing consistently. In the first quarter of 2023, real GDP grew by 1.3%.

And it's not just the USA that is waking up from the Covid economic slumber; the whole world is. And that affects supply chains across the globe. So as more Americans are starting to purchase new goods and services, it takes a while for the global supply chain to catch up. In the meantime, prices rise because there isn’t enough supply to match demand.

Job Numbers Looking Good

The U.S. economy added around 4.8 million jobs in 2022, and through May 2023, 1.57 million jobs have been created this year. This is more jobs than economists expected and is a cause for optimism about the economy. In fact, private sector employment is now higher than in February 2020, before pandemic lockdowns in the U.S. started.

In April, the unemployment rate was 3.4%, the lowest it has been since 1969. While unemployment increased slightly to 3.7% in May, the low rate spells good news for Americans. Inflation remains a concern, but there are specific things that can be done to make it less of a problem.

So what can be done?

The Inflation Reduction Act

The Senate passed the Inflation Reduction Act, which curbs inflation by investing in health care and environmental preservation.

The Act lets Medicare negotiate lower drug prices for seniors and caps out-of-pocket prescription drug payments to $2,000 for people on Medicare. Both of these things help seniors save money and strengthen the economy.

The Act also gives incentives to businesses for using carbon-free energy sources and funds pollution monitoring in communities hit hard by air pollution. These are wins for the economy and the environment.

Improving the Supply Chain

One thing that will help is improving the supply chain, so that goods can reach the US faster. On October 13th, the administration worked with some of the biggest ports in the United States to improve the speed at which they can process shipping containers. They announced expanded operations at Port of Los Angeles and supported running the ports 24/hrs to help relieve backlogs of goods. Improving the supply chain will help bring in more goods and decrease prices.

Creating Energy Independence

Another solution is to help release oil reserves to decrease gas prices. The whole world is short on energy, and bad actors like Putin know it. Over the last few months, Putin has been accused of withholding gas in order to drive up prices and hurt the US economy. However, on November 23rd, the government decided to release 50 million barrels of crude oil reserves to decrease the price of gas. Decreasing gas prices has a rippling effect on the prices of most goods. Cheaper transportation results in cheaper goods. By releasing oil reserves, the administration hopes to not only decrease gas prices but also help reel in inflation and decrease the prices of other goods.

Learn more about how inflation works and what can be done to decrease prices for everyone.