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How did we get here? Some of the main reasons include:
📌 The pandemic scrambled the inflation picture: Prior to COVID-19, inflation rates followed a fairly consistent pattern, based on goods and services. However, that was turned upside down in 2020, when demand and supply-chain issues caused food and car prices to rapidly rise, followed by gas more recently.
📌 We now have an overheated job market: For the first time in decades, there are more jobs available than workers, which means businesses are understaffed, are unable to function at full capacity and shortages ensue; This also aids to inflation.
📌 COVID stimulus bills boosted income too much: In 2020, the Fed quickly cut interest rates to zero, followed by Americans receiving three stimulus bills. While this boosted spending, it made it so strong that inflation eroded peoples’ purchasing power.
📌 Nominal spending became an issue: Gross domestic product fell below its previous trend in 2008, causing lost economic output and unemployment. In 2020, policymakers did the opposite, and pushed spending way above its trend line. Our economic output couldn’t keep pace, so again, inflation ensued.
Keep your glass half-full: I know we are all sick of the word “transitory”, but it should at least be clear that the inflationary period we are experiencing today is significantly different than what was experienced in the 70s.