If you have tuned into the news in the past two years, you would likely have heard countless stories of how COVID-19 has negatively impacted our economy. Inflation tends to be one of the main priorities of the Federal government, as it has rapidly increased to levels that we have not seen in over 40 years. But what is it?

While “inflation” tends to have a negative connotation in today’s media, it is not necessarily a bad thing. In fact, inflation can be an indicator of a healthy and thriving economy, likely stemming from growth in population and economic activity. The literal definition of inflation is “the rate of increase in prices over a given period.” This means that the purchasing power of a currency decreases since prices are increasing around you. The cost of living can increase due to the rise in the prices of housing, goods, and services. According to the United States Federal Reserve, the target rate of inflation resides around 2 percent over a long period of time. In theory, if the inflation rate exceeds this goal, there could be economic consequences. Unfortunately, the COVID-19 pandemic has caused problematic increases in inflation that harm our economy.

What were key factors in inflation today?

When the COVID-19 Pandemic hit, the federal government passed the CARES Act which offered economic relief to both businesses and everyday citizens across the country. Included in this was a stimulus package that granted unemployed individuals weekly $600 payments, tax relief, loan forgiveness (meaning that the government simply got rid of some loans), and over $650 billion in loans to small businesses to keep employees. While it was necessary for the federal government to offer economic relief, the long-term effects of this act have harmed our economy. 

According to the US Bureau of Statistics, the U.S. unemployment rate reached as high as 14.7% in April 2020, one month after the U.S. saw its first nationwide lockdowns hit. Because of this, the government needed to increase the buying power of citizens to stimulate the economy and keep it afloat. This has raised the demand for everyday goods such as groceries and gas, which has caused prices to surge. With a lower supply of everyday goods and services, the individual demand for such has fed into the increases in inflation that we see today.

As restrictions have been lifted, and overall economic activity has increased, we have seen inflation on a constant rise. The United States inflation rate increased to 7% in December 2021 (see attached image), over double the target interest rate [2%] set by the Federal Reserve. Since inflation rates have been on the rise, the government and other financial institutions have sought ways to combat it. One way that inflation can be combated is by raising interest rates. If banks raise interest rates, people will be more willing to save money and allow interest to accumulate in their accounts. However, the more money that is saved, the less economic activity there will be. This means that the economy will slow down to offset inflation rates. 

What Does Inflation Mean For You?

Inflation has impacted almost every aspect of our financial lives today. We have seen the cost of groceries rise which makes it harder for lower-income families to stay afloat. We have also seen that the cost of gas has increased which makes it more expensive to simply drive around our neighborhood. Additionally, the combination of inflation and supply chain issues have increased shipping costs, delivery times, and prices in both in-person stores and online. As world-renowned economists and the government search for answers to solve our economic problems, we can hope that answers will be on the way soon.

Has COVID-19 Done Anything Good for Businesses?

While COVID-19 has certainly affected our economy in several negative ways, there is still room to remain optimistic about the future of business. We have seen advancements with several businesses going digital or virtual. This creates opportunities for technology to advance in order to create more practical solutions for businesses to remain competitive while working from home. Employers across the nation have seen increases in productivity levels and happiness from employees which has created more revenue for businesses. Since many businesses have gone virtual, this reduces costs for businesses and can open the door for more profit than ever before.

Additionally, the rise of digital assets and currencies has also made it to mainstream media and business platforms. Cryptocurrencies such as Bitcoin and Ethereum have become a household name for everyday citizens as these currencies look to create faster transactions and reduce transaction fees between two parties. NFT’s (non-fungible tokens) have also become mainstream and marketed as digital assets that you can buy and sell on several different marketplaces. With NFT’s, you can assume royalties on these assets, along with the verification that you own an authentic asset through blockchain. While this has been prominent in the media, this is just the beginning of the digital world. With companies such as Meta looking to advance virtual reality, NFT’s and Cryptocurrencies can see even more practical uses in gaming, shopping, and entertainment.

While the COVID-19 pandemic has been detrimental to the health and safety of our country, it still has the potential to be a true financial blessing in disguise. As the government and financial institutions work to stabilize the economy, the opportunity for all people to innovate has opened the door to new ideas and advancements in society. It is the job of industries across the workforce to do their part in advancing our economy and technology to grow as a nation. While the COVID-19 pandemic has set back the nation quite a bit, it has allowed us to reinvent the true meaning of the “American Dream.”

Sources:

https://home.treasury.gov/policy-issues/coronavirus

https://www.federalreserve.gov/faqs/economy_14400.htm

https://tradingeconomics.com/united-states/inflation-cpi

https://fred.stlouisfed.org/series/UNRATE