If there’s been one word to describe the economy for the past couple of years, it’s inflation. Covid-19 had many severe economic effects, but none felt more real than inflation. Seeing the prices anywhere go up since COVID has caused financial stress on everyone, and it seems like prices are never going to go down. More and more Americans are still on the edge, and it’s becoming a bigger and bigger problem each day. Many Americans are still left questioning if there's ever going to be light at the end of the tunnel. And the good news is, there just might be.
Why did inflation rise so much in the first place?
In 2024, pre-covid and post covid seem worlds apart. Our lives were flipped around in just a couple of months. Everything seemed to go downhill in that “2-week quarantine”. But how did, what seemed like such a small thing at the time, affect the economy that much? Well, it all had to do with just those couple of weeks. Since most business and economic activities came to a screeching halt, we almost entered a recession. All these people at home still have demands, but there was no one at work to create the supply to meet them. This created pressure on what was available and drove up the price of those goods. On top of that, the supply chain was congested and blocked due to COVID-19. This means that no goods or resources were coming into the country, no one at work to create supply, and people at home who wanted things badly. All of this strain against the economy when everything came to a halt, caused prices to skyrocket. This caused businesses to shut down, people to be laid off, and us to be on the brink of a recession. This sent the country into turmoil, and mandated government relief. The stimulus checks that rolled out caused inflation to rise another 2.6% but prevented a bigger crisis. Over time this pressure kept building and building and inflation rose and rose because of it, totaling a rate of 4.70% in 2021, and 8.3% in 2022.
Is it ever going to stop?
For many Americans over the past couple of years, inflation has made them feel hopeless. Many Americans have stopped spending as much and have had to cut back. It seems like there is no end to this problem, and it’s just going to keep getting worse and worse. But we are starting to see the light, and we will make it out.
As I'm writing this, it’s 2024. Thankfully the worst part of COVID is behind us. Things have been back to normal for a while now, and we are starting to return to life the same as before. This means great things for the economy and we’ve already taken good steps to combat inflation. As of now, supply chains aren't very congested anymore and goods are flowing in and out of the country at a much higher rate. This is great news for us, it means more economic activity in total which takes away that bottleneck pressure from the supply of goods. However one of the main tools that has been used to combat inflation has been raising Federal Reserve interest rates. You’ve probably heard this term thrown around a lot, and it's really important to help mitigate inflation.
Raising the Federal Reserve interest rates is the Fed's main tool to help combat inflation. If you don’t know how it works, it might seem counterintuitive. How does raising interest rates decrease the price of things? But this is the most direct way that we can mitigate inflation.
See the problem with inflation is it’s very, very hard to control. It’s been over 70 years since America has been able to get interest rates under 5% without causing a recession. Everyone, in some way, always gets affected by inflation. And the actions that we do to try and help ourselves, can just end up increasing it more. With the way inflation works, trying to solve the issues individually. Supplying people with money just increases the unit value of money. Think about it like this. If you have 1 pair of shoes, it’s probably pretty important to you. You might want to keep them clean and take good care of them. But if you have 5 shoes, you probably care about each one a little less. They most likely mean less to you, and you don't value each one as much. Now if you have 10 pairs of shoes, each one means even less to you and you probably care a lot less about each one. It’s the same thing for money. What this means is that there is more money everywhere so money gets diluted and decreases in value. Since there’s more money and it has less value, it takes more money to buy the same things, driving inflation even more. The people just end up in this rat race of getting and losing money because of the rising prices. That’s why giving out stimulus is a big deal in government, and it’s only done in the worst situations. Because of this, the government has to work from the source, to truly reduce inflation for everyone.
So they turn to the federal interest rate. The Fed is the central bank in America and increasing their interest rates affects everyone. A central bank is a bank for your bank. When they raise their interest rates it incentivizes our banks to stop borrowing and to keep cash on hand. As a result, economic activity slows down. Less money is spent, less is moved, less is invested, fewer jobs are created, and a multitude of other things. This depression in economic activity means that less money is being put into the system from the Fed and the money that is already out is more valued. This depression also causes businesses to lower their prices, directly combating inflation, and leveling consumer spending. All of these things directly contribute to lowering inflation and help bring value to our money.
Until now the Fed has increased the interest rates 11 times since March 2022. This has had its ups and downs but it’s important to remember these changes take time. To get banks to stop borrowing and keep their cash on hand involves so many processes and can take up to 2 years. We are starting to see the effects now however and inflation has been on a downward trend recently. Several experts are theorizing that this is the year inflation will really go down and come back to normal without having to undergo a recession. The fed has played their part, and even through struggles they are managing to get the inflation rate down and return our lives to normal. I know these past couple of years have not been easy on anyone, but we are getting to the light at the end of the tunnel. Everything that has happened in the economy over the last couple of years is going to surface now. We will come back to normal and get out of this time. So to answer the original question, the break is coming, and it’s coming very soon, this strain on the economy will go away and these hard, taxing years will come to a close very, very soon.
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