Have you noticed the extra dollars on your food bill? Or those rental prices slowly creeping up? Your mind isn’t playing tricks on you.
Inflation is the number one culprit behind steep food prices, eyebrow-raising energy bills, and insurance brokers committing daylight robbery.
Sure, the economy is starting to lick its wounds, but we’re not out of the woods just yet—far from it.
Why inflation is so high in the US.
How inflation has impacted the nation.
If inflation affects you.
Who benefits from inflation.
If the US is heading for hyperinflation.
How to protect yourself.
In 2012, the Federal Reserve set an official inflation rate of 2% to keep prices under control. But annual inflation currently stands at 5%.
If not managed, inflation can only go one way—hyperinflation.
Yes, it’s real—and plenty of countries with high inflation have experienced a complete economic collapse firsthand.
Want to see the inflation by country? Download our inflation report here.
To avoid meeting the same fate, we need to know what triggers inflation—and make sure we don’t fall into the same traps.
What is Inflation?
Inflation refers to the phenomenon where the general level of prices for goods and services in an economy is rising over time.
Causes of inflation include:
An increase in demand for goods and services.
A decrease in supply.
Changes in the money supply.
And how does inflation work?
When inflation hits, the purchasing power of currency goes down—meaning that the same amount of money can buy fewer goods and services than it could before.
This can have a huge impact on consumers, businesses, and the overall economy—so it’s closely monitored by policymakers and economists to ensure stable economic growth.
Why is Inflation So High In the US?
Prices don’t just shoot up from nowhere. So why is inflation so high right now?
In 2020, the world was violently rocked by the pandemic. We were left with record-breaking unemployment rates, a stock market crash, and a recession to top it all off.
Just as we were getting back on our feet—boom, we were hit with rising interest rates and an outbreak of war across the pond.
And as if that wasn’t enough, inflation has come to visit like a distant relative who’s long outstayed their welcome.
But what causes inflation and how exactly did we get to this point? Let’s break it down—
Supply and demand
The Covid-19 pandemic caused worker shortages, shipping chaos, and disruptions across the supply chain.
Demand for goods grew steadily as the government fed new money into businesses and households to keep them afloat.
As demand began outweighing supply, companies started bumping up their prices.
Interest Rates
Instead of reducing the growth rate of money, the Federal Open Market Committee (FOMC) began boosting interest rates to control growing demands.
In early 2022, the FOMC raised rates to a total of 3.75% in less than nine months to try to return to its 2% long-term target.
The Fed increased interest rates (yet again) by 25 points in the last month, despite the ongoing banking crisis.
Spending Growth
While the Fed increased interest rates, public spending continued growing.
In February 2023, consumer spending increased by $27.9 billion (0.2%).
If spending continues to creep up, the Fed could be forced to boost interest rates even more—and if spending drops, we could have another recession on our hands.
Geopolitical Tensions
The Russia-Ukraine region is a key producer of essentials, like fertilizer and wheat.
The invasion of Ukraine sent ripples across already fragile supply chains—interrupting production and pushing up prices.
Rising costs led to an increase in global inflation of 1.3 percentage points.
Impact of Inflation: How Bad is Inflation Right Now?
Last year, seven-in-ten Americans viewed inflation as one of the biggest problems in the US.
And judging by the monthly Consumer Price Index (CPI), those worries aren’t unfounded.
The CPI measures changes in prices for goods and services. Their recent data on inflation rates show we’ve moved away from the 9.1% peak, but we’re much higher than stable pre-pandemic rates.
Here are some key figures to make sense of this inflation rollercoaster ride:
All tracked items increased by 0.1% in March and 5% in the last year.
All items (excluding food and energy) went up 0.4% in March after rising 0.5% in February.
If those rising prices have escaped your attention, let’s find out what’s causing you to go over budget.
Food
Consumer food prices increased 9.5% from February 2022 to February 2023—down from 10.1% in January and 10.9% in December 2022.
Food was unchanged for the current month but is up 8.5% on a yearly basis.
Food prices away from home rose 8.4% from February 2022 to February 2023.
Cereals and bakery products went up 13.6% over the last year.
Fruit and vegetables increased by 2.5%, while non-alcoholic beverages rose by 11.3% in the last 12 months.
Housing
The index for housing was the largest contributor to the monthly items increase.
The housing index went up by 8.2% over the last year, making up over 60% of the total increase in all items (apart from food and energy).
Housing has risen by 0.6% for the current month of March.
Energy
The index for electricity rose by 10.2%, and natural gas increased by 5.5% over the last year.
However, gasoline and fuel dropped 3.5% in March and are down 6.4% over the last 12 months.
Energy services (electricity and natural gas) were also down 2.3% on the month (but up 9.2% on the year).
Vehicles
New vehicles had a monthly increase of 0.4%—up 6.1% over the last year.
Motor vehicle insurance also skyrocketed by 15% in the last 12 months.
But used vehicles fell 0.9% in March and down 11.2% over the year.
How Does Inflation Affect You?
Chances are you’re going to have an encounter with inflation at some point. Whether at the grocery store or the next time you chat with your landlord.
So, how will you be affected?
Money Savers
Saving money to protect yourself against rainy days is never bad. But if you’re trying to save up in a storm, those defenses won’t be able to keep up.
To put that simply, interest rates just can’t keep up with the rising inflation—which means you start to lose your purchase power over time.
If inflation exceeds your interest rates, retirees can struggle to keep up with their standard of living. And you’ll effectively lose money if you’re saving up for a house or college fund.
Small Business Owners
Inflation is never a lone ranger. It usually comes with supply chain disruptions, high-interest rates, and rising costs. All of which is bad news for small businesses.
Services become more costly, and it becomes more expensive to borrow money. Companies are often forced to lay off workers or increase their prices to keep up with the competition.
During peak inflation in 2022, the monthly expenditure of small businesses dropped by 5%, from $11,401 in Q1 to $10,884 in Q3.
Stock Holders
The stock market is known for being volatile—but add on inflation, and you’re in for a rocky ride.
With interest rates rising, stocks can take a hit when high rates have a negative effect on equity valuations. Growth stocks often suffer the most as value stocks have a strong cash flow to support them, which can grow slowly over time.
According to the Russell 1000 Index (a stock market index), in 2022 their Growth Index was down 25.7%, and the Value Index was down 7.6%.
Renters
Inflation means higher prices across goods and services, and the cost of real estate is no exception.
And as real estate prices increase, landlords can raise their rental prices and gain more profit from their fixed mortgage rates. Renters in high-cost areas like New York and San Francisco get hit particularly hard.
The average monthly rent in Manhattan showed a 29% annual increase, going past $5,000 for the first time in July 2022.
And across the US, rent inflation climbed to 8.2% in March 2023. This is up from 8.1% in the prior month (the highest rate since June 1982).
Who Benefits From Inflation?
For most of us, inflation means holding your breath whenever you dare to look at your bank balance.
But there are those who’ll go unscathed by the rising costs—some will even benefit from it.
And before you get your pitchforks and torches, we’re not just talking about the filthy rich. There are plenty of semi-normal folks and sectors that benefit from inflation.
So let’s uncover them—
The energy sector
Energy prices have reached new heights over the past year. But guess who still needs gas to drive to work and electricity to sustain their weekly Netflix binge habit?
Unless we all go on an extended tech-free camping trip for the foreseeable future, energy companies can keep hiking up the prices, knowing there’s plenty of demand out there.
And it’s not just the CEOs who are raking in the profits. Those investing in energy can also jump on the money-making bandwagon.
Precious metal owners
If you’re lucky enough to have some gold and silver lying around, you could be in luck.
While prices for food and energy are tossed around by the inflation storm, the cost of precious metals remains relatively unscathed.
Research has discovered that gold has a track record of acting as an inflation hedge and rose by 14.9% during times when the US was seeing high inflation rates.
However, gold isn’t totally free from price fluctuations, so it works best as a long-term investment if you want a more reliable inflation hedge.
Homeowners with a fixed mortgage
Here’s one that most of us can relate to (and complain about)—mortgage rates.
Unless you have an adjustable mortgage rate (ARM), those with a fixed-interest mortgage loan will be well shielded from rising rates.
The same can’t be said for renters, though, who have much less control over increasing rental prices.
Landlords
While tenants are paying the price for inflation, landlords have the opportunity to profit from rising costs.
With fixed-mortgage rates, landlords can generate a higher income by bumping up prices.
But there’s a catch. By increasing rental prices, landlords risk losing tenants to cheaper nearby properties, especially in low-income zones.
Those who can afford to increase the rent are often found in higher-income areas with more modern properties under their belt.
Is the US Headed for Hyperinflation?
Before we answer, let’s explain what hyperinflation actually is.
Let’s put it this way—if your weekly grocery bill went from $50 to $100 in a month, and then soured up to $1,000 in half a year, you’re probably experiencing hyperinflation.
Sounds crazy—but hyperinflation is alive and taking down countries across the world.
Here are some of its devastating consequences—
The inflation rate in Venezuela currently stands at 156%, making the Venezuelan Bolívar the most inflated currency. Its central bank recently introduced a new 1-million-bolivar bill to help with transactions, but due to currency rapidly losing value, the new bill is only worth about 50 cents.
Argentina’s inflation rate hit a record-breaking 102.5% in February this year. Prices across consumer goods have doubled since 2022, landing many of its citizens in poverty.
Lebanon reached an annual inflation rate of 189.67% in February—an increase from 123.53% in the previous month. The Lebanon pound also hit an all-time low, with 140,000 pounds to the dollar.
Zimbabwe experienced a hyperinflation crisis for almost two decades, and had a daily inflation peak of 98% (meaning prices would double almost every day). Unemployment rates reached 80%, and poverty spread throughout the country.
So, is the US going to be the next Zimbabwe?
Probably not. Despite rising rates, the US economy is still strong enough to stay clear of hyperinflation. But to bring the economy back to a stable condition, all eyes will be on the Fed.
Cory Mitchell, an analyst from Trading.biz, commented:
While the Fed’s rate increases have eased inflation, the market is still anticipating at least one more rate hike to 5.25%. That rate hike in May will probably happen, yet the Fed is close to getting inflation under control, and the stock market is liking it.
Cory Mitchell analyst at Trading.biz
However, this doesn’t bring much comfort to those living pay check-to-pay check unless the Fed gets transparent about its role in inflation and how they may have misjudged their formula when raising interest rates.
How To Fight Inflation
It’s not all doom and gloom, though. Here’s how you can take steps to protect yourself (and your cash) from fluctuating inflation rates and (re)gain control of your finances—
Do your research
Knowledge is power. To stay ahead of the game, you need to learn the rules.
Make smart investment choices, like investing in value stocks or precious metals, to keep on top of inflation and maintain the value of your portfolio. Aim to diversify it—inflation affects each asset differently, so spreading your investments can help protect you from the impact of inflation.
Adjust your business practices
Rising costs make it difficult for small businesses to survive, let alone thrive.
To keep on top of expenses, businesses can manage the expectations of customers and make reasonable price increases to meet the higher costs of running the business.
Figure out areas where you can cut down and only consider extra expenses and expansion when it’s feasible. You can also pinpoint cost-effective marketing strategies that could boost your profits.
Manage your spending
If prices are rising, the obvious thing to do is cut back on spending.
Easier said than done? Try using a budget calculator and plan how to cut down on costly items, such as food and energy.
By cutting costs on overly expensive products and saving money, you’ll be more prepared if inflation continues to rise, or if you get hit with any unexpected emergencies.
Reduce your debt
Inflation erodes the purchasing power of your money over time. If you have high-interest debt, inflation makes it more difficult to pay off that debt because your money is worth less than it was when you borrowed it.
By lowering your debt, you reduce the amount of money that inflation can impact, while also freeing up your income to save and invest.
Is Inflation Going to Get Worse?
The history of inflation in the US is a rocky one.
This isn’t the first time we’ve faced economic hardship, and it likely won’t be the last—but learning from past mistakes is key to moving forward and building resilience.
The Federal Reserve is taking steps to reduce inflation, such as stabilizing interest rates and scaling back asset purchases. As a nation, we can also fight inflation by investing in infrastructure, increasing productivity, and promoting economic growth.
While the current inflationary environment may be challenging, there’s hope for a brighter future as the economy continues to recover and adapt to changing conditions.
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