In the past year the nation has been experiencing a dramatic increase of prices for most goods and services, known as inflation. From transportation to food to affording a place to live, most aspects of daily life have been impacted by rising prices across the nation.
In 2022 gas prices increased by 48.7%, according to the Bureau of Labor, and the average national rent is estimated to have risen by 5% from June 2021 to June 2022. So, as students begin to move back to college and live on their own, understanding why inflation is happening and what they can do to save money is crucial.
To make the best financial choices in the current economy, one must first understand the root causes of inflation. University of Idaho Associate Clinical Professor of Economics Steven Peterson explained that there are three primary causal factors behind the inflation that hit this year.
The first being that the central bank, which the federal reserve system designed to control the monetary system and help alleviate financial crises, moved an excessive amount of money.
“One is that the central bank had put too much money in the system, they held interest rates too low for too long.” Peterson.
The second factor according to Peterson is the high amount of fiscal, or governmental, spending that occurred during the COVID-19 pandemic. Between the Trump and Biden administrations, the amount of COVID-19 fiscal spending adds up to about $5.2 trillion.
“The focus during the pandemic was to keep the economy from collapsing…and get us out of the recession we went into during COVID-19,” Peterson said. “There was a fair amount of high governmental spending and a fairly high amount of the central bank injecting money into the system. And we didn’t seem to have any inflationary impacts from that, and then about a year ago it just exploded.”
The final factor, which Peterson believes was the catalyst in causing the inflation to explode so dramatically, is the supply chain issues that are a result of the pandemic. Labor shortages and depleted inventory levels are a development tied closely with COVID-19 and pandemic recovery efforts. When supplies are low, prices must go up, and along with high fiscal spending and low interest rates, the result is the current inflation.
With prices increasing across the board, the main areas seeing the highest price hikes are housing, food and energy. Food prices increased by 10.4% and energy has increased by 41.6%. While the core inflation, which is all items except food and energy, is currently at 5.9%. Housing and rent have also increased dramatically, across the nation and especially here in our own community.
“In Latah County, from about 2016, to the present, the price of a typical house has nearly doubled,” Peterson said. “Idaho itself had the fastest growing housing prices in the country from 2018 to 2020 – and rent increases in Idaho ranked third in the nation.”
The central bank is making an attempt to ease the country out of this inflation, however the economy is in a delicate position and it may be impossible to achieve. Unfortunately, Peterson predicts an economic recession might be coming in the near future.
“What they’re trying to do is thread a needle, where they can raise interest rates to break inflation without growing the economy in a recession.” Peterson said, “The problem with that is that it’s only been accomplished a couple of times. Usually, we end up in a recession. So, if I were guessing, I think we’re going to be in a recession.”
For those who rent an apartment or home make sure that the rent contract is fixed and locked in, so that it won’t rise along with inflation. In this situation a yearly rather than six month lease may be advantageous to avoid major price hikes, according to Peterson.
Peterson also suggests, “If you’ve got money laying around in the checking account line for future expenses, take a careful look at where you’ve got an interest-bearing alternative to put it into, to act as a partial offset to inflation as interest rates are starting to rise.”
This may be a difficult next year, however, knowing why inflation exists and what it’s affecting will allow people to make more intelligent financial decisions. And with time the state of the economy will improve, according to Peterson, the country may be going through the worst of it right now.
“The good news is, this might be the highest spike. We see indications that other prices, gas and food, are starting to fall,” Peterson said. “So, I think this is the highest point, we’re going to start seeing inflation rotate.”
Grace Giger can be reached at [email protected]