America’s overheating economy and unrest overseas have inflation soaring to heights not seen since the early 1980s. While the Federal Reserve is expected to raise interest rates again, Tulane economist Felix Rioja doesn’t see much relief on the horizon for consumers squeezed by the rising cost of food, gasoline and other necessities.
“Bringing the inflation rate back to 2% by the end of the year is unlikely given the recent oil price shocks that tend to reinforce inflation,” said Rioja, a professor of economics at Tulane University School of Liberal Arts. “The Fed’s rate hikes will start bringing the inflation rate down through the year, but it won’t be quick, and it likely won’t go back to 2% in the medium term. Once it rises, inflation is typically persistent. It is hard to bring it down quickly.”
He expects around a 7 percent increase in the cost of goods in 2022 with increases slowing as supply constraints ease and interest rates rise.
Rioja is available to speak about why we’re seeing rising prices, what consumers can expect and what the federal government must do to address the issue.
Why is inflation at record highs? It’s a combination of factors that have drastically changed the supply and demand for goods. The pandemic, the government’s response to the pandemic and the current war in Ukraine are all behind the spike.
“The onset of the pandemic brought layoffs and voluntary exits from the labor force leading to lower supply of goods and services,” Rioja said. “Then supply chain issues added to the increased costs of production. The government responded quickly to the pandemic with the American Rescue Plan, providing families with stimulus payments, extended unemployment benefits and expanding the child tax credit. The recent increase in world oil prices and uncertainties from the war in Ukraine is likely to put pressure on increasing inflation further.”
Rioja said that the monetary policy conducted by the Federal Reserve is the primary tool to try to bring down inflation. Higher interest rates are designed to cool down spending and the economy, thus lowering inflation. However, Rioja said it is possible to avoid a recession, given the current climate. Still, inflationary periods that come with adverse supply changes in the past have brought recessions, and this time may not be an exception.
Rioja is available to speak about what it will take for the current inflation rate to slow and what the federal government must do to avoid a major recession.