U.S. policy decisions seem helpless against recession

The sustained rise in inflation continued into June. For the 12 months ending in June, the consumer price index increased by 9.1%, the most significant annual increase since 1981.

Since Jerome Powell became the chairman of the Federal Reserve, inflation has been rising at a fast pace. Despite the various factors contributing to the rise in prices, the Fed did not expect inflation to be so severe.

In addition to food and energy prices, the rise in inflation was also due to the invasion of Ukraine by Russia. Over the past 12 months, energy costs have increased by 42%.

Even though food and energy prices have gone up significantly, core inflation, which excludes these two volatile components, rose by 5.9% over the past year.

Enduring inflation

In February 2021, the consumer price index was at its lowest since 2011. It then accelerated through the following months, rising by over 2% in March, 4% in April, and 5% in May. In December, it hit a year-on-year mark of 7%. Throughout the year, the consumer price index has consistently risen at an annual rate of 8%.

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Despite the various factors contributing to the rise in prices, the U.S. has not experienced worse inflation in several decades. In 1947, the country's inflation peaked at around 20% due to the effects of the Second World War and the supply constraints caused by the sluggish consumer demand. During the 1970s and 1980s, inflation peaked at around 14% before the Fed started raising interest rates.

For several months, Powell and other officials of the Federal Reserve maintained that high inflation was a transitory phenomenon that would eventually dissipate. However, most economists now believe inflation will rise next year as the demand for goods and services exceeds the supply.

The Fed has changed its course by raising interest rates several times this year. It is now trying to prevent the economy from recession by slowing down the growth rate.

Despite the strong job market and low unemployment, many economists believe that the Fed's continued credit tightening could cause the economy to recession.

Encouraging recovery results in prolonged inflation

In 2020, the pandemic severely affected the economy, causing employers to lose over 22 million jobs. During the pandemic, businesses temporarily closed their doors, and consumers stayed home as a precautionary measure. The economy contracted at a record-breaking rate of 31% during the April-June quarter.

Fortunately, the economy was able to bounce back in the following year. It was mainly due to the government's financial intervention and the lower interest rates that the Fed had been able to provide. During the spring of last year, the release of vaccines prompted consumers to return to their usual activities.

The post-pandemic circumstances forced businesses to scramble to meet the demand for their products and services. They could not hire fast enough to meet the demand and purchase the necessary supplies. As a result, the global supply chain was severely disrupted.

The costs associated with the pandemic were mainly caused by the increase in demand and the decline in supply. Many companies were able to pass on the higher prices to their consumers.

Critics also pointed out that the government's $1.9 trillion stimulus package, which included rebates of $1,200 checks to most households, was not enough to help the economy. They also blamed the lack of supply for the rising prices of stocks, homes, and other assets. Some additionally claimed that the Fed's policy of keeping interest rates near zero for too long contributed to the runaway spending.