3 reasons inflation will calm down further after decade highs
- Although the Biden administration has said the surge in inflation will only be temporary, price growth has still not slowed down.
- Stubbornly high inflation has raised fears of a new era of permanent price spikes.
- Still, three trends are poised to drag inflation to healthier levels and put an end to the price hike in the era of the pandemic.
You’ve probably noticed that prices are still skyrocketing. You’re not alone. Inflation remains high across the economy, from gasoline to grocery costs. No matter where you spend, inflation is there.
This is not the situation in which the Biden administration and the
counted. Both have long said the pandemic’s searing inflation will be “transient” and subside as the economy recovers.
This does not happen. Inflation remained at decade-long highs in September, compounding fears that the price spike would become permanent.
Government officials have sounded the alarm. The high price growth will continue until 2022, Treasury Secretary Janet Yellen said on Sunday, adding that inflation is unlikely to subside until “the middle to the end of next year.” And outside of the Biden administration, CEOs including Elon musk and Jack Dorsey have warned that inflation will stay high longer than expected.
But despite all the fears of soaring inflation, we are probably not facing a crisis. Here are the three reasons why price growth in the United States will slow further over the next 12 months.
America’s population is not growing as fast
The country is undergoing a seismic shift in its demographics. At one end of the age bracket, baby boomers are rushing into retirement. Americans are more likely than ever to retire before age 62. And the entire baby boomer generation is expected to be at least 65 by 2030, according to the Census Bureau. As the massive group ages, their collective spending will ease and baby boomers will put less upward pressure on inflation.
Young Americans do not fill the void. Population growth has slowed to the lowest rate since the Great Depression in 2020, the Census Bureau said in April. Much of the slowdown was fueled by lower family formation among young adults. Millennials have been hit by two unprecedented recessions in the space of 15 years, leaving many with finances in jeopardy. And growth is not expected to rebound. The Brookings Institute predicted in June that fertility rates would likely lag behind replacement rates for the foreseeable future, Insider’s Hillary Hoffower reported.
A sustained surge in inflation would require continued strong demand. With population growth set to slow further, spending by Americans is more likely to stagnate than soar.
Rich Americans are hoarding money
Even if the population grew faster, spending likely wouldn’t change much. Research shows that Americans with lower incomes have the highest marginal propensity to consume, meaning they spend more when they get a raise or bonus. Conversely, wealthier Americans spend less of their bonuses and instead save a lot of money.
This gap should keep inflation anchored. The richest 5% of Americans held more than two-thirds of the country’s total wealth at the end of 2016, according to an article published by the National Bureau of Economic Research. Meanwhile, an analysis from Pew Research shows that middle-income and low-income Americans hold smaller and smaller shares of American wealth until 2016.
If the trend continues, more of the country’s wealth will be saved by wealthier Americans. This should dampen spending by the rest of the population and prevent prices from skyrocketing.
The global supply chain crisis is on the decline
Much of the higher inflation seen today stems from a global maritime mess. A global energy crisis, power outages at factories, shipping delays and bottlenecks at ports have strangled supply chains. At the same time, spending by Americans has steadily increased as the country reopens.
Demand is booming, but companies are struggling to consolidate supply. This has fueled price increases throughout the economy.
Yet experts already believe the worst is over. There are signs the United States has “passed the peak,” and the entanglement in the supply chain will see a “significant improvement” by the second half of 2022, said economists at Jefferies led by Aneta Markowska earlier in October.
The White House called on companies like FedEx, Walmart and UPS earlier in October to work 24/7 to ship orders and overcome massive backlogs. Separately, the Port of Los Angeles announced on October 13 that it would work around the clock to handle container ships. More recently, the ports of Los Angeles and Long Beach said they would begin fining shipping companies $ 100 per day for every container left on the docks.
The cleaning is therefore in progress. As shipping lines heal, supply is expected to rebound and better match demand. The shortages that pushed inflation up through 2021 are quickly fading.