Inflation: Why US Prices Soared to the Highest Level in 3 Decades

The cost of living in the United States has soared.

The inflation rate in October reached 6.2% in the last 12 months, the highest value recorded in the country in 30 years, according to the US government statistics agency. In comparison, the index in Brazil is already at 10.25%.

Food, fuel, automobiles and housing are some of the products whose price increases drove this historic record in the US.

As in Brazil, rising inflation has been a growing concern for consumers as purchasing power declines. Products like meat, fish and eggs have risen more than other foods, and gasoline prices have peaked in the past seven years.

Inflation is accelerating as the economy recovers from the effects of the covid-19 pandemic, population consumption increases and bottlenecks persist in supply chains that affect the normal flow of goods globally.

Asked about inflation, US President Joe Biden said reducing the rate is one of his “top priorities.”

But what is behind this rise and what can be done to try to contain it?

Problem with multiple factors

In an interview with BBC News Mundo (BBC’s Spanish service), Elijah Oliveros-Rosen, senior economist at the consultancy S&P Global Ratings, said that the inflationary jump “was influenced by the prices of energy products” as well as the bottlenecks in the global flow products, rising commodities and the high cost of housing.

“Energy prices are expected to continue to rise in the coming months, but at the same time, the impact of bottlenecks on supply chains is likely to lessen,” he added.

That’s what American Bessy Clarke feels on her skin, in relation to the price of gasoline. “In general, every week, it goes higher and higher.” She used to spend $23 (R$126) to fill her tank and now can’t do it for less than $30 (R$164), about a 30% increase.

“I’m thinking about how to limit my travel,” says the New Orleans waitress, who is also facing high food prices. “Even at the restaurant where I work, the price of meat has gone up and now we have to pass this price on to the consumer.”

In Brazil, with the price of gasoline (due to several factors, including the rise in the dollar and political instability), the average price of fuel increased by almost 40% in the last 12 months, according to official data from the Brazilian government. Ethanol rose 65%.

Another factor that has contributed to the rise in inflation in the US is the shortage of workers, a situation that has made wages rise in some sectors of the economy, leading companies to pass on the high cost to the products they sell.

The number of people leaving their jobs indicates that wages will rise at an annual rate of between 4% and 4.5%, wrote Michael Pearce, economist at consultancy Capital Economics.

Americans are leaving their jobs at a record rate that reached 4.3 million people in August, nearly 3% of the workforce. It is a phenomenon known as “the great renunciation”, another of the economic consequences left by the pandemic.

There is also a shortage of products, caused by problems in supply chains around the world during the pandemic. The consensus among experts in the field is that the so-called “container crisis” will not be fully resolved until next year. And the most pessimistic believe it could extend into early 2023.

The problem is that rising inflation, difficulties in the labor market and shortages of some products “are interlinked problems,” said David Wilcox, a researcher at the Peterson Institute for International Economics in Washington, in an interview with BBC News Mundo.

Interest increase among consequences

In addition to raising the cost of living for ordinary citizens and making business operations more expensive, record inflation is putting pressure on the US Central Bank (Fed) to raise interest rates ahead of schedule.

“Interest rates are able to contain a little this worsening (of the inflationary scenario) by holding down economic activity and prices,” explained economist Silvio Campos Neto, from the consultancy Tendências, to BBC News Brasil. That’s because, by raising the cost of credit, they make businesses and consumers spend less and encourage them to save more—since the money saved is remunerated at a higher interest rate.

The Fed, responsible for monetary policy in the world’s largest economy, has announced an increase in interest rates (the cost of money) for next year. And, in parallel, it began a gradual reduction of its bond-buying program, launched to support the economy after the crisis caused by the pandemic.

The expectation of financial market analysts is that, due to inflationary pressures, the Fed will be able to anticipate the rise in rates, a movement that directly influences the financial markets and the global economy.

For now, the Fed’s goal is to get closer to its goal of keeping inflation in a flexible range around 2%. Remembering that it is currently around 6%.

“The increase in inflation is worrying, but we have to be calm, because it is not an indication that we will see a permanent escalation”, said Hugo Osorio, deputy manager of Investment Strategies at Falcom Asset Manager, in an interview with BBC News Brasil.

According to analyzes released by the Fed, current inflationary pressures are “transient”, which would justify its decision not to anticipate a rise in the cost of money. However, other economists are skeptical and argue that rising inflation will be more permanent.