After fifteen months of instability and high spending from the Federal Reserve, the US economy is gradually returning to pre-2020 levels. The sudden outburst of deferred spending in the spring of 2021 has spurred extremely high inflation rates, however.
The sudden flurry of spending, combined with multiple stimulus checks and low interest rates per the Fed’s aggressive strategy, has led to an inflation rate that rivals that seen in 2008 at the height of the recession. In May 2021, the inflation rate was five percent higher than in May 2020, sparking new concerns that this inflation rate could lead to stunted economic growth.
The high inflation rate is being driven primarily by a sudden increase in demand, causing supply constraints. Throughout the past 15 months, the supply of high-end electronics has been throttled by a number of factors. A global semiconductor shortage led to bottlenecks in the production of nearly all electronics, including smartphones, video game consoles, graphics cards, and new cars.
The inability of auto manufacturers to create enough cars to fill demand has had serious rolling effects on prices across the board. New cars are pricier, driving many prospective buyers to used cars. As such, even used cars are in short supply, leading to a price hike. A similar snowballing effect is at play with graphics cards, too.
Two other sectors are seeing a huge influx of spending: air travel and clothing. After a year of grounded flights and deferred travel, airlines are eagerly bringing in customers who are ready to leave their houses. To make up for the lost time, airfare costs are much higher now than they were a year ago.
Likewise, clothing was at the bottom of most people’s shopping list when they were spending most of their time indoors. The production of new clothing was also severely limited throughout 2020. As such, the recent uptick in spending on new clothes has driven fashion costs higher.
The Federal Reserve has expressed that this inflation is likely to be only temporary. Policymakers for the central bank have noted that, in spite of spending meant to keep a high amount of currency in circulation, prices have remained low for the last year. As such, some inflation is to be expected as the economy reopens.
However, should the situation continue to worsen, it is likely that the central bank could reverse its policies and attempt to bring inflation back in line with federal targets.