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Throughout the second half of 2021, economic observers have expressed concerns that the U.S. economy is in the midst of an inflationary period. Ongoing supply challenges due to the COVID-19 pandemic have driven up costs in many key consumer spending categories. Aggressive federal stimulus measures have pumped more money into the economy throughout the pandemic. Workers’ wages are rising, particularly at the lower end of the wage scale, as many businesses continue to struggle to attract and retain labor.
These factors have created inflationary conditions, where the amount of money available in the economy is exceeding the availability of goods on which to spend. The result as of late has been successive months of higher-than-usual increases in consumer prices, as measured year-over-year from 2020 to 2021: 5.4% in September, 6.2% in October, and 6.9% in November. Earlier in 2021, some economic experts—including the U.S. Federal Reserve—called this period of inflation a transitory one that would be corrected as supply chain issues worked themselves out. The consensus now is that this period of inflation is likely to have a long-lasting effect on prices that will raise Americans’ cost of living, and the Federal Reserve recently shifted away from the use of the term “transitory.”
Current levels of inflation have raised alarm in part because the pace of price increases is much greater than it has been in recent years. The Federal Reserve typically sets monetary policy in the U.S. to target an annual inflation rate of 2%, and for most of the decade since the last recession, inflation has remained below that level. But beginning in June 2021, the rate of year-over-year price increases has topped 5% each month, and the rate of month-to-month increases has shown little sign of slowing down.