This is the biggest one-year jump seen in the government's consumer price index since 1990.
As inflation tightens its grip on the economy, the Federal Reserve has begun walking back previous assurances that it will be a temporary, post-pandemic blip. Economists at Goldman Sachs warned in a research note last week that inflation is "likely to get worse before it gets better," and could persist well into next year.
PHOTO: A sign displays the price of a gallon of gasoline at a gas station in the Staten Island borough of New York, Nov. 10, 2021. But monetary policies also affect inflation, he said. Keeping interest rates low and injecting a lot of money into financial markets -- actions the Fed took to help buoy the economy during the health crisis -- can also be linked to the high inflation we are now seeing, according to Goldstein.
The economic phenomenon known as the "wage-price spiral" can develop when prices increase and then workers ask for higher wages -- which can then lead to further increases in the prices of goods and services, and these can lead to a further increase in wages and so on. In this manner, inflation can become a self-fulfilling prophesy of sorts. This ever-intensifying wage-price spiral characterized the U.S. economy in the '70s, ultimately resulting in double-digit inflation.
Historically, however, inflation has been linked to negative impacts in the stock market. One reason for this is that inflation restricts the ability of the Federal Reserve to take action. After stricter policies defeated the spiraling inflation in the U.S. in the early 1980s, the Fed has been able to ease monetary policy following stock market crashes and adverse events such as the Global Financial Crisis in 2008 and the COVID-19 pandemic.
The Federal Reserve will likely raise interest rates and ease the pandemic-era expansionary monetary policies that injected liquidity into financial markets, according to Goldstein, though he added that this is a "tough balance" as the economy still teeters toward a recovery. In the short-term, anything the Biden administration -- which operates independently of the Fed -- can do to help ease the supply-chain bottlenecks will also help with keeping prices of goods down.
Some people choose to invest in the stock market, but as Goldstein mentioned, the stock market can be a bit of a mixed bag "because there could be overall macroeconomic implications that will push the stock market as a whole down.""The value of cash is going to get eroded," she said. "You want to look for, at the very least, a savings account that offers some interest.
Still, Powell said that he believes "our dynamic economy will adjust to the supply and demand imbalances, and that as it does, inflation will decline."
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