Placeholder Image

Subtitles section Play video

  • - [Narrator] Last year, policymakers were convinced

  • that inflation would be.

  • - Transitory. - Temporary.

  • - That's a transitory thing.

  • - [Narrator] But over a year later.

  • - I think I was wrong then about the path

  • that inflation would take.

  • - [Narrator] For most of 2022,

  • inflation has lingered above 8%,

  • a 40-year high.

  • It's affected everything from gas prices to groceries.

  • But why has it lasted longer than many experts expected?

  • There are a few key factors

  • that propped it up and made it tricky

  • to predict what comes next.

  • The first is consumers have more to spend.

  • At the beginning of the pandemic,

  • emergency measures from Washington,

  • including stimulus checks, loan pauses,

  • low borrowing costs and more flushed the economy with cash.

  • - And those resources really built up

  • and it was a large stockpile of dry tinder

  • that was ready to spend as the economy loosened up.

  • - [Narrator] This is the US personal saving rate.

  • The amount of money households have left over

  • after they spend and pay taxes every month.

  • This spike and the ones that followed contributed

  • to $2.3 trillion in extra savings,

  • which is one of the reasons consumers have continued

  • to spend as prices have gone up.

  • - There was pent-up demand.

  • Humans are social animals.

  • They wanted to go back out to restaurants,

  • they wanted to see their friends,

  • they wanted to visit families.

  • It resulted in more spending

  • but it also resulted in companies demanding higher prices.

  • - [Narrator] The Fed estimated that there was still a stock

  • of $1.7 trillion in excess savings in mid-2022.

  • And as consumers have continued spending,

  • companies have been hiring to meet that demand.

  • - There was just such a demand

  • for workers after the pandemic

  • that companies had a lot of openings for positions

  • that they just couldn't fill

  • and an environment of very low unemployment.

  • - [Narrator] Here's a chart that helps show

  • just how strong the job market is.

  • This is the number of job openings,

  • and this is the number of people who are unemployed.

  • - On the one hand, you have an excess of demand

  • from all the money in household bank accounts

  • and the other is you have a deficit of supply

  • from shortages of not only workers

  • but also goods sourced in global supply chains.

  • - [Narrator] To help try to fill those vacant positions,

  • and encourage workers to stay on,

  • businesses have also raised wages.

  • Compensation for private

  • and state and local government workers

  • has grown by 5% from last year.

  • But when companies raise wages,

  • they often raise prices to make up the difference.

  • - As wages go up, companies respond by raising prices.

  • But as prices go up, people say my cost of living

  • is going up, you've gotta increase my pay.

  • And this process starts feeding on itself.

  • - [Narrator] But aside from consumer spending power

  • and the labor market,

  • inflation has just been a really hard target to hit.

  • - It's kind of been like watching a game of Whac-A-Mole.

  • Every time you see inflation pop up in one area

  • and think you understand it,

  • it puts its head and down pops up in some other area.

  • - [Narrator] Price increases have rippled

  • through the economy at different times.

  • In 2021, prices for things like groceries, cars

  • and gas were pushed up by economic recovery

  • from the pandemic.

  • Then in 2022, airline tickets rose as well

  • as the war in Ukraine drove up the price of jet fuel.

  • And as some of those prices started to ease,

  • housing kept going up

  • as the economy reopened and rents increased.

  • - So inflation has run right through your home,

  • from the stuff you put in your home,

  • the televisions and the furniture

  • to the actual cost of living in the home,

  • from the goods sector to the services sector,

  • right there in your own day-to-day life.

  • - [Narrator] And that bouncing around

  • has made it harder for the Fed

  • to forecast how long policies need to be enacted

  • in order to bring inflation down.

  • - I just think that the inflation picture

  • has become more and more challenging

  • over the course of this year, without question.

  • That means that we have to have policy

  • being more restrictive

  • and that narrows the path to a soft landing.

  • - It's using this instrument

  • that hits certain sectors of the economy harder than others.

  • So it raises interest rates,

  • which raises the cost of interest

  • in interest-sensitive sectors,

  • like housing but it might not hit other parts

  • of the economy where inflation is acute.

  • - [Narrator] The International Monetary Fund says

  • that interest rate increases have their peak effect

  • on inflation after three to four years.

  • - Monetary policy has long and variable lags,

  • which is another way of saying it takes time

  • for these effects to work their way into the economy.

  • And the backdrop to the economy

  • is constantly changing.

  • That's the variable part.

  • So it takes time to play through

  • and how it plays through is unpredictable.

  • So the story is still unfolding.

  • - [Narrator] The Fed made another interest rate increase

  • at the beginning of November

  • and said that they may push interest rates higher

  • than originally expected.

- [Narrator] Last year, policymakers were convinced

Subtitles and vocabulary

Click the word to look it up Click the word to find further inforamtion about it