When will price increases end? Probably never

It’s not just the US facing that problem. In almost every advanced economy in the world, the average annual rate of inflation in the first quarter of this year was at least twice what it was last year.

Inflation doesn’t end, it just gets less bad. And, in fact, we don’t want it to end entirely.

The Federal Reserve, the US central bank tasked with lowering the rate of inflation through a series of interest rate hikes, is aiming for a target of around 2%. That means that prices will still rise, just not nearly as much.

When people say inflation is easing, they don’t mean that groceries are getting cheaper. They mean that they’re not going up as much each month. It’s very rare to enter a deflationary period, and the government likes to avoid it if possible as it usually indicates that the economy is cooling way too rapidly.

So yes, inflation will continue on for a very long time, but you won’t notice it as much. Between the start of 1991 and the end of 2019, year-over-year inflation averaged about 2.3% a month. Those are ideal increases, the kind that cost of living raises can keep up with, the kind of “in my day a soda only cost a nickel” increases that become obvious only over long swaths of time.

That doesn’t mean some prices won’t come down, of course. The price of gas, for example, has fallen significantly over the past two months. Food prices could also fall. Food and gas prices are more volatile than other expenses because they’re impacted by outside factors like supply chain issues and Russia’s war on Ukraine. The Federal Reserve can’t do much to control them, and they tend to swing in both directions.

But for the most part, prices of goods will remain higher, and consumers won’t feel relief until their wages catch up to the new prices. Over the last four decades, there hasn’t been any deflation in core goods, which exclude food and energy, said Nick Roussanov, a professor at Wharton finance. Durable goods and services, like cars, appliances and education, rarely come down in price.

The Fed is now trying to shorten the length of time it takes for wages to catch up to these new prices. The longer it takes for that to occur, the more likely it is that Americans dip into their savings or take on credit card debt. It’s already happening: Over the past year, credit card debt has jumped by $100 billion, or 13%, the biggest percentage increase in more than 20 years.

Inflation won’t continue at the current pace forever. Most economists predict that it will come down to that target rate of 2% by 2024.

So yes, things will continue to be painful, but they won’t be anything like the bring-a-wheelbarrow-of-money-to-purchase-a-loaf-of-bread inflation crises we learned about in history class. No one is worried about hyperinflation, at least not in the United States.

That’s not to say that high inflation won’t stick around for a while.

There have been long periods of elevated inflation in the US before: In the 1970s the US economy suffered three recessions during which the underlying inflation problem never went away. But monetary policy has shifted since then. In that same decade, central banks had multiple objectives: high output and employment and price stability. Today, the Fed tends to prioritize price stability over those other mandates. That means Fed Chair Jerome Powell has a mandate to increase interest rates until inflation falls, even if the economy falls along with it.

The US is likely safe from hyperinflation: To be sure, prices are elevated, but not unprecedentedly so and they eased last month.

Still, other countries are suffering. Inflation in Argentina is sitting at a 20-year high of over 70%, and the country’s central bank has raised its main rate of interest to 69.5% as it tries to contain soaring prices. Turkey’s annual rate of inflation, meanwhile, hit almost 80% in June — its highest level in about two decades.

Long-term elevated prices tend to plunge some countries into periods of instability, which in turn raise food and gas prices globally. They also impact developing nations more severely and, according to a UN report, could upend the progress made over the past decade to fight climate change.

https://www.cnn.com/2022/08/17/economy/inflation-markets-economy/index.html