Sean
Monday, August 8, 2022
Why is inflation so high right now?
Inflation hit a four-decade high in June. The main reason for this high inflation is mostly due to high gas prices. The average nationwide price of gas was a record $4.67 per gallon in June.
The reason that higher gas prices lead to inflation is because it costs companies more money to transport goods by truck across the country to retailers. The retailers in turn pass the higher rates onto the end consumer.
If you go to your local grocery store you will see that the prices have gone up for most food items.
What are they doing to try and bring prices down?
The government is trying to use both the levers of monetary policy and fiscal policy to bring down inflation. Monetary policy refers to the actions of the Federal Reserve to achieve macroeconomic objects. Fiscal policy refers to the tax and spending policies of the federal government.
Here’s what they’re doing:
- Monetary policy – To tame inflation, the Fed has hiked interest rates significantly in the past few months. They did this in hopes that less people will borrow, which will take money out of the economy and reduce demand, thus pulling prices down.
- Fiscal policy – Biden proposed an Inflation Reduction Act to help control inflation. It has passed in the senate and is now up for vote in the house.
So why are gas prices high right now anyways?
There are two main reasons why the price of gas is so high:
- The war in Ukraine – When Russia invaded Ukraine, the West introduced financial sanctions on Russia that made it difficult to import oil. Russian oil accounts for about 10% of the global oil supply.
- Travel is returning to pre-pandemic levels – Since transportation is back at pre-Covid levels, the domain for gasoline has gone up significantly, causing an increase in prices due to the relationship between supply and demand.
Gas prices are finally dropping though
Gasoline prices, which hit a record high earlier this summer, have fallen sharply in recent weeks. They are now below $4 a gallon in parts of the country, even as the national average remains above that level around $4.08. That’s a drop of more than $0.50 in a little over a month.
That’s a relief for drivers – and for inflation.
