The Waiting Game: Inflation

Brandon Hwang, Editor-In-Chief

Let’s cut to the chase: domestic inflation is at a historic, 40-year-high. The current economic circumstances we observe in the new fiscal year are certainly not desirable, but they have been anticipated due to a number of factors that economists and policymakers continue to babble about. 

The White House has argued that such inflation exacerbated due to factory shutdowns in Asia, which diminished supply chain routes and manufacturers necessary for our consumers. Shipping routes that have been ineffectual due to overtaxed fares seem to substantiate the White House’s arguments, especially as most of Europe is facing similar economic woes in that prices are particularly high. In other words, the White House continues to cite inefficient, international economic practices, and such reasoning continues to carry weight as discussions regarding Russia-U.S. relations point to possible recessions. 

However, the White House will not acknowledge what many other economists contend to be the ultimate source of inflation: the influx of spending through stimulus initiatives under the Biden Administration. With a significant proportion of the U.S. population receiving stimulus checks, it comes to no surprise that consumer spending increased dramatically, thus amplifying demand from various firms to produce goods and services (in a few major cities, spending has increased by 15%). Such demand, coupled with punctured supply chains, seems to have led to the current situation we face as a nation. 

Inflation’s impacts are particularly apparent in the stock market. The VIX (CBOE Volatility Index) sits around the high-30s, paralleling highs from November 2020, which indicates rapid changes in the stock market. The S&P 500 Index (measuring the 500 largest stock companies) is down 8% from what was observed a mere few weeks ago. 

Escalating prices nationwide have taken a dramatic toll on our collective economy, but it has been reported that the FED will signal to raise interest rates in March. Historically speaking, inflation and interest rates follow an inverse relationship, meaning that high inflation is associated with lower interest rates and low inflation is connected to higher interest rates. Such economic phenomena can be explained by our banking system. Lower interest rates allow consumers to take advantage and borrow in greater quantities from the bank, stimulating spending. Higher interest rates burden consumers, refraining borrowing practices and attempting to reduce spending efforts. 

Until the FED acts, it’s a waiting game.