There is no question that inflation is one of the most important issues impacting the US economy in 2023. However, the annual inflation rate has dropped considerably since hitting a 40-year high of 9.1% in June 2022. According to The Guardian, the price of goods and services in the US rose by 4.9% year-over-year (YoY) in April, marking the 10th consecutive month of decline. However, prices continue to grow at a rate that is more than twice the Federal Reserve’s target rate of 2% a year, causing financial hardship for many American households.
This situation is not limited to the US, and can quite comfortably be regarded as a global issue. According to the Financial Times, inflation has started to drop from the multi-decade highs observed in many countries around the world. Although the most recent data for the world’s largest economies still raises concerns, as the war in Ukraine continues to keep energy and food prices elevated, there are countries where inflationary pressures have eased and the wholesale prices of energy and food have declined. This makes economists and investors predict that inflation will ultimately stabilize in the coming years.
However, in order to accurately predict the state of the economies in the future, it is vital to understand what is driving prices up right now.
What Is Behind the Rising Prices?
Surging inflation can appear due to various factors, including excessive consumption and an economy’s incapacity to meet the demand for goods and services. When more people spend money on scarce goods or services, producers and service providers tend to raise prices, as it mitigates the risk of substantial sales decline. Additionally, inflation can be triggered by supply shortages. According to CNN, economists have stated that the recent inflation wave has been caused by pandemic-era supply chain bottlenecks, the conflict between Russia and Ukraine, as well as various US economic policies. However, some economists have pointed to “greedflation”.
According to them, enterprises are leveraging elevated inflation rates as an opportunity to engage in price-gouging, thereby maximizing their profit margins. In a recent note, Albert Edwards, the global strategy economist at Société Générale, emphasized that the main reason behind the price surge is the fact that companies are capitalizing on customers by increasing prices in order to generate additional profits. A recent New York Federal Reserve study seems to confirm and expand this hypothesis. The study was conducted among 700 businesses in New York, Atlanta, and Cleveland, and it presented customer demand as the most influential factor for organizations when determining pricing strategies.
Over 82% of the companies surveyed indicated that customer demand plays a significant role in shaping their pricing decisions. In contrast, only 52% said they factor in the overall inflation rate.
Achieving Price Stability
During periods of economic stress, particularly when inflation is elevated, the economy can drift between striving and coasting to obtain price stability and financial stability. According to the International Monetary Fund (IMF), achieving both objectives can become challenging. This is why central banks found themselves compelled to implement substantial increases in key rates to moderate economic activity and restore inflation to the desired target level. Following an extended period of low and stable inflation along with low interest rates, numerous financial institutions had grown complacent when it came to mismatches between maturity and liquidity. These issues are now threatening overall financial stability.
With companies in the US and abroad continuing to increase the prices of their goods and services, achieving price stability seems to have also become a challenge. Based on their first-quarter earnings reports, big enterprises like Colgate, Procter & Gamble, and PepsiCo have implemented price increases that exceed the US inflation rate, reaching double-digit figures. However, according to CNN, the fact that the Federal Reserve is raising interest rates and the economy is showing signs of slowing down, means that customers could soon become less inclined to bear the burden of rising prices for various goods and services.
The New York Federal Reserve study confirms this prediction, demonstrating that companies have already expressed expectations of seeing reduced cost and price pressures in the upcoming year.
The Bottom Line
Prices may remain high for a time, despite waning inflation. The main reasons why achieving price stability is a difficult task at this time are inflation, customer demand, “greedflation,” and the ongoing conflict in Ukraine. However, numerous organizations have already stated that price pressures are expected to drop in 2024, as the US economy finds its balance.
