How Long Will Inflation Last in the United States?

　　Before we delve into this topic, it's important to explain what inflation is.

　　Inflation, often abbreviated as inflation, refers to the phenomenon where the purchasing power of currency declines, leading to a general increase in prices. Simply put, money loses its value. Previously, $100 could buy 100 apples, but now the same amount of money can only buy 50 apples.

　　Image source: XHBY

　　The inflation rate is a measure of inflation levels, typically expressed as a percentage. It is calculated based on economic data such as the Consumer Price Index (CPI). For example, if the annual inflation rate this year is 4%, it means prices have risen by 4% over the year. The Federal Reserve's current goal is to keep the inflation rate around 2%.

Causes of Inflation

　　The causes of inflation are typically driven by changes in supply and demand dynamics, such as increased demand, rising costs, or an increase in the money supply. Supply and demand refer to the relationship between sellers offering goods needed by buyers, such as towels and fruits. If demand increases, sellers adjust prices and supply accordingly. Rising costs and increased money supply can also disrupt supply and demand balance, which is essentially what causes inflation.

　　The first reason for the current prolonged inflation in the United States is partly due to the base effect and also attributable to the policies enacted in response to the COVID-19 pandemic. The pandemic prompted the adoption of loose monetary and aggressive fiscal policies in the U.S., leading to a sharp increase in demand that disrupted supply and demand equilibrium. Despite the Federal Reserve's early emphasis in 2021 that inflation was temporary, the current results indicate that inflation has persisted for over three years.

　　Various factors contribute to inflation, with the second reason being the 2022 Russia-Ukraine war. Global economic conditions deteriorated due to the conflict, intensifying pressure on commodity prices and presenting significant policy challenges. Russia is a major supplier of oil, natural gas, metals, wheat, and corn, while Ukraine is a key supplier of wheat and corn. However, under the pressures of war, the supply of these commodities decreased sharply, resulting in substantial price increases and higher costs for importing countries in Europe, the Middle East, and beyond.

　　It's worth noting the impact on Russia's natural gas supply, particularly the Nord Stream gas pipeline project that stretches from Russia through the Baltic Sea to Greifswald, Germany. This project, originally intended to benefit countries along its route, was temporarily halted due to political pressure. The war has led to soaring prices for food and fuel, causing significant harm to lower-income families worldwide.

　　Additionally, wars can lead to the restructuring of trade chains. Eastern Europe and Central Asia have close trade ties with Russia, and the conflict has increased the costs associated with these trade chains while reducing trade activities.

　　The third reason is that wage increases for residents have not kept pace with the rapid rise in prices. According to data released by the U.S. Department of Labor, the unemployment rate in May rose by 0.1 percentage point to 4%, with the non-agricultural sector adding 272,000 jobs. The continuous increase in the U.S. unemployment rate in May indicates that many graduates entering the market during graduation season were unable to find work.

Federal Reserve Measures to Address Inflation

　　Market forecasts indicate that the Federal Reserve will implement multiple interest rate cuts in 2024 to combat inflation. By the end of 2023, when U.S. inflation data stabilized, some institutions even predicted that the Fed would reduce rates by more than 125 basis points in 2024, with up to 8 cuts. However, current outcomes suggest this expectation was overly optimistic. More recent predictions suggest the Fed may cut rates no more than twice in 2024, and there is even a possibility of rate hikes.

　　Federal Reserve officials have emphasized the need to monitor inflation data closely before making decisions. Despite the benefits of lower interest rates in stimulating economic activity and growth, such policies may pose risks and challenges in curbing inflation. Therefore, the Fed must carefully consider various economic factors and expectations when making decisions to ensure a balance between economic stability and inflation control.

When Will Inflation Finally End？

　　When inflation first emerges, markets often hold optimistic expectations for its eventual decline. However, changes in the international landscape, persistently high inflation rates in the United States, and the stubborn nature of inflation itself have blurred the outlook for its trajectory.

　　This current bout of inflation is primarily the result of a combination of early fiscal and monetary phenomena and shocks to supply. It has now evolved into a struggle between wages and prices. Looking ahead, with the restructuring of trade and supply chains, the resilience of the U.S. economy, and other factors, inflation is likely to persist for some time. Ending it in the short term appears challenging.

　　Image source: The Wall Street Journal