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Wednesday, June 16, 2021 Leer en Español

Here’s Why Price Inflation Could Remain Elevated for Several Years

If it does, average American families will suffer.

Image Credit: PixaBay

Over the last year, consumer prices have increased roughly 5 percent, the biggest increase in 13 years. Driven in large part by the federal government’s reckless money-printing, such steep price increases will cut Americans’ paychecks and erode their savings. Now, in a concerning twist, we just got reason to believe that elevated levels of price inflation could persist over the next several years.

A new survey by the Federal Reserve Bank of New York measured inflation expectations—what consumers expect will happen—and found that many are anticipating more price increases to come. The latest figures reveal consumers expect prices to rise 4 percent over the next year, with median expectations coming in at 3.6 percent for the next several years.

Of course, these are just peoples’ expectations about the future. They are by no means guaranteed to come to fruition. However, price inflation often causes a harmful spiral and self-fulfilling prophecy that ultimately leads to more price inflation.

Here’s the simple version.

When price inflation goes up, as has recently occurred, people start to anticipate that prices will keep trending upwards. When consumers expect prices to go up in the near future, they are incentivized to buy more today and often do so. But when everyone starts buying more now, this puts upward pressure on prices and can ultimately cause more price inflation. This can lead to a painful cycle where prices keep going up and consumers’ rational reactions further perpetuate the problem.

Many factors affect inflation, of course, but this might occur in our present situation. If it does, average American families will suffer as their real standard of living is eroded and their savings are ebbed away.

To avoid such a scenario, all policymakers have to do is avoid the loose money-printing that caused the original bout of price inflation and potentially sparked this possible harmful future cycle.

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