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People Setting Up Hopes For A Higher Inflation In The US In 2021 May End Up Getting An Unpleasant Surprise

Inflation is an economic phenomenon that describes a general increase in the prices of goods and services over a given period. In the US, inflation is calculated through the Consumer Price Index, which is a percentage rate of change in the level of prices in an already selected market over time.

Statisticians believe that 2021 will bring inflation in many countries as a side-effect of the coronavirus pandemic. The International Monetary Fund claims that the annual inflation rate in the US will also increase in 2021 and will project around 2-2.24% in the US in terms of a general increase in the pricing of goods in the upcoming year. Now, this means that what you buy today for $100 will cost you around $102 in 2021. This is considered as a moderate inflation projection.

While 2-2.24% is a moderate inflation projection, the central banks are always wary of too much inflation or too much deflation, which is the opposite phenomenon. When there is a very high rate of inflation, the purchasing power of consumers decreases, and that results in decreased growth of the country’s economy and a decline in its GDP. Higher inflation will always devalue the currency unless the interest rates go higher than inflation too. For savers also, higher than 2-5% inflation is unhealthy because the higher the inflation, the lower chances they get to see a return on their money.

On the other hand, if there is deflation, then also everyone suffers. When the prices increase in a country, companies and employers also increase their wage offerings. In cases of deflation, companies and employers are forced to cut out wages and lay off people. This is not good for the country’s overall productivity. So, inflation and wages seemingly are directly proportional to each other, the higher one goes, the other follows too, even if the money does not go so far.

High Unemployment Incoming In 2021

Sadly, because of the pandemic, the companies had to lay off millions of employees in the US. And now we are close to the end of 2020, but the unemployment rate is still high. Experts think that the unemployment rate will remain high till the mid of 2021 also. Now, this means that whatever inflation is expected in the US in 2021 may get muted because of the elevated unemployment.

Inflation is Necessary To Pay Off Debts

Inflation is not a catastrophe. According to the famous economist Ludwig von Mises, inflation is a policy that helps governments to pay off their debts. Currently, there is a lot of debt on almost all the governments because of the pandemic, and the same is the case with the US government. However, a healthy dose of inflation is needed to erode the budget deficit and see the tax revenues rising. This will have a positive impact on the overall income too, even if the economy remains stagnant for a while.

Inflation Is Set to Help Boost the Economy

Forecasters who have been predicting the US inflation in 2021 say that it will rise around and above 2% for a while, but somewhere around the q2 of 2021, it will start falling below that level. Economists believe that this will happen because of the unemployment issue.

Investors on the other hand believe that inflation will not go down as such. To support their prediction, they present the breakeven rate of 10 years which has reached 1.91%. Almost a decade ago, it was around 0.47%. This is a measure that calculates the average inflation rates over the next 10 years. So, by looking at how it has increased, investors are pretty confident that it will continue to rise even in 2021 and ahead too.

Services will see a boom once the nation gets vaccinated.

The COVID-19 vaccine has already been developed and will soon come to the markets. This will eventually help to control the disease in the US. Once the disease is in control, all the services sectors that have been closed due to the pandemic will re-open. People who have been going through episodic lockdowns will also resume their pre-pandemic activities in a full swing. So, the services will be back in demand. Now, this will cause service providers to increase their prices. However, since their labor force will be slacking and their supply resources will also be diminished, the increased prices will bring a balance for the increased consumer demands in comparison to the diminished supplies.

As an overall result, the consumers may be forced to take down the prices and on a general scale, the inflation is likely to go down eventually. The services sector contributes around 60% to the overall consumer price index and makes up around 75% of the core measure, excluding energy supplies and food. So, the consumer services industry has a high stake in the CPI and if it gets the prices on consumer goods down, then inflation will also go down. And that will not be good for the government or the economy.

However, input prices and the costs that businesses are paying are increasing in the US, and these base-effects will eventually push the inflation rate to 2% or above, despite the high unemployment rate.

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