The US has traditionally been one of the world’s most free-market economies, with an especially loose monetary policy since the Great Recession. That’s led to high levels of inflation as the cost of living increases in tandem with inflation. It’s a government-reported situation that everyone gets accustomed to: The consumer price index measure of inflation has been on the rise for over five years.
“We’re into a business model that long ago incentivized two-step price increases to get people to switch,” Neil MacKinnon, strategist at VTB Capital, tells CNN Business’ Money on Wednesday. (MacKinnon says that in the past, certain businesses like airlines and hotels may have been willing to disrupt their customers in order to raise prices in their favor.)
“That is something that the business community has not been at all keen on and that is one of the major constraints that (the Federal Reserve) is dealing with and, if you can do that through fiscal policy, you can really push inflation even higher,” he says.
What’s causing higher prices?
MacKinnon’s colleague at VTB Capital, Anirban Basu, also tells CNN Business’ Money on Wednesday that “reduced availability of core goods is the culprit,” since manufacturing costs have gone up because workers are less available.
If manufacturing picks up, that is supposed to be reflected in lower prices in a faster pace of economic growth. Inflation “is giving out, that’s been a signal for quite some time,” says Basu.
What’s the impact?
Ever rise in inflation can mean consumers are footing the bill for wages to grow even faster — which also means higher prices. Overall inflation for workers has been rather low, despite all the increases in prices.
So far, though, that hasn’t been enough to lead to wage increases in the “low to mid 3%” range. Wage growth has clocked in at just 2.9% year-over-year, according to the Bureau of Labor Statistics.
Unless wages rise much faster, which hasn’t happened for a while, businesses would then have more pricing power to squeeze even more inflation. They could eventually feel confident enough to pass higher costs to consumers.
So why does all this matter?
There are some modest benefits to a rising inflation, because it might encourage the Fed to be more aggressive on its normalization of interest rates. Raising interest rates would be expected to reduce inflation through sapping the demand for a cheaper dollar. Additionally, an increase in inflation might eliminate the need for the Fed to continue easing policies to stimulate the economy, as it did in previous years after the recession hit.