How inflation transformed the American economy in 2022

Pavel Muravev / Getty Images / iStockphoto

Pavel Muravev / Getty Images / iStockphoto

Analysts have blamed everything for the inflationary crisis of 2022, from OPEC and Russia to wage increases and corporate price gouging.

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Looking back: year in review 2022

But prices were already rising rapidly in the final months of 2021 as a hot economic flush of cash boosted demand into the new year.

“An increase in the money supply leads to more money chasing the same number of goods and services,” said Oberon Copeland, owner and CEO of Veryinformed.com. “This leads to higher prices as companies pass their higher costs on to consumers.”

The US economy experienced a tidal wave of economic growth into 2022, and the inflation that followed touched nearly every aspect of American financial life.

This year’s inflation was payment for last year’s growth

America dug itself out of the 2021 pandemic much faster than its global peers, but the tradeoff to last year’s impressive economic recovery has been this year’s cost-of-living crisis.

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According to the Center for Economic and Policy Research (CEPR), between the fourth quarter of 2020 and the fourth quarter of 2021, the US economy grew 5.5%, GDP grew 2.3% from 2019 levels, before the other six G7 countries had gone back to zero.

CEPR credits American Rescue Plan (ARP) cash injection for impressive economic turnaround. But if true, the compromise was the highest inflation rate in 40 years. Politifact claims that the $1.9 trillion stimulus package triggered a demand-driven inflationary push that likely accounted for about half of 2022’s price hikes.

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In short, the stimulus allowed consumers to steer the country straight from recession into an inflationary crisis.

Impressive job growth defied expectations – and the Fed

According to the Treasury Department, the unemployment rate stayed at or near a 50-year low for most of 2022, never reaching 4% after January. For months, the remarkably resilient job market was all that stood between America and a recession as inflation soared, a bear market took hold and the economy posted two consecutive quarters of negative GDP.

But an economy that was steadily creating jobs and rising wages also weakened the Fed’s ability to tame inflation with rate hikes.

“The Federal Reserve has tried five times in the last year to lower inflation by raising interest rates,” said Collin Plume, a 20-year financial services veteran and CEO of Noble Gold Investments. “The idea is that if people have to pay more to borrow money for car loans or mortgages, they will spend less on everyday necessities. Demand falls, prices fall. But it did not work. Demand still exceeds production and workers are demanding higher wages, so companies keep prices high to maintain profit margins.”

Borrowing slowed, but consumers continued to spend

The Fed’s anti-inflationary measures made borrowing more expensive. Predictably, both home sales and auto sales fell as interest rates rose.

While requests for large-scale funding cooled, traditional consumer spending never slowed for the Fed’s speed limits.

“The Federal Reserve is trying to fight inflation by raising interest rates and making borrowing more expensive in order to rein in spending and bring inflation back to its 2% target,” Williams said. “But because American consumers have barely changed their spending patterns this year, the Fed’s fight against inflation has become more difficult.”

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Hidden but harmful insurance inflation hobbled Budgets out of the shadows

The impact of inflation was most evident on utility bills and in restaurants, grocery stores, and gas stations — but it also lurked in insurance policies. While insurance inflation isn’t as easy to spot as rising gasoline prices, it still affects household spending power.

“Premiums for both home insurance and auto insurance rose in 2022, with the latter rising nearly 5% and impacting nearly 7 million policyholders nationwide,” said Luke Williams, finance expert at ExpertInsuranceReviews.com. “Insurance premiums for homeowners have also risen, with nearly 200 requests for rate increases from carriers in over 40 states.”

Policy Genius reported in July that the average home insurance price rose faster than inflation, and a Fortune study showed auto insurance rose by as much as 20% in some states.

Inflation was hardest on those who could least afford it

According to the New York Times, in 2020-21, low-income households needed to immediately spend their pandemic stimulus payments on immediate needs like housing, groceries and car repairs — but the wealthier were able to save and invest theirs.

When the highest rate of inflation in 40 years forced everyone to spend more on the same amount of goods and services, low-income households were right where they started before the economic revival. With their budgets already leaving room for little more than the bare minimum, they had the fewest opportunities to cut back on spending.

“People often see inflation as a problem for the rich because it erodes the value of their cash,” said Gary Zimmerman, founder and CEO of MaxMyInterest. “It’s actually a much bigger problem for those who live paycheck to paycheck.”

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The Times profiled people from three income brackets to see how they reacted to inflation. The least affluent resorted to drastic lifestyle changes, like showering at the local YMCA to cut utility bills and skipping even the simplest pleasures, like a favorite brand of crackers.

Those with comfortable salaries of up to $100,000 made much easier compromises, e.g. B. reducing appetizers at restaurants — but they kept traveling, planning weddings, and living their lives mostly unencumbered.

Those earning more into the six figures were aware of rising prices but typically did not have to make sacrifices in their daily lives to adapt to the changes.

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This article originally appeared on GOBankingRates.com: How Inflation Changed the American Economy in 2022

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