The painful way to fight inflation

The finances of American households are turning to a heavy patch.

Consumer prices have been rising at the fastest pace since 1981, and given the breadth of today’s rapid inflation – which manifests itself in various costs such as airline tickets and apartment rentals – it is unlikely to fade completely on its own. Trying to fight them will probably be painful for many working families.

The country’s main tool for combating price increases is the Federal Reserve’s policy. The Fed is trying to bring inflation back under control by raising interest rates, which is causing a chain reaction to cool the economy. Higher interest rates increase the cost of mortgages and corporate borrowing, which slows business growth and leads to lower employment. As the labor market weakens, wage growth slows, further limiting buying. Less shopping allows supply to catch up.

IN a challenge for many working families is that their wages may slow before prices rise. Fed officials predicted last week that unemployment would start rising by the end of the year, but inflation will remain up 5.2 percent.

This means that consumers’ purchasing power is likely to erode after several months of wage growth already failed to keep up with rising prices. At the same time, rising interest rates have led to unsettled markets and led to a sharp drop in stock prices, cutting off many domestic nesting eggs. Higher mortgage costs slow down the housing market and can reduce the value of housing, further reducing wealth – because for many families real estate makes up a large part of net worth.

As household incomes and balance sheets suffer, many Americans may wonder: Isn’t there a better way to tackle inflation? Today I will explain why politicians choose this painful path.

Prices usually jump when consumers and businesses are looking for more goods and services than companies can or are willing to provide. To use a recent example, search for cars bounce up last year, but car companies were unable to increase production fast enough to meet the jump amid a shortage of parts. While buyers competed for a limited number of sedans and pickups, prices skyrocketed.

Fed policy works on the demand side of this equation. When fewer people shop for cars because car loans are expensive and the labor market feels less secure, less supply of vehicles may be enough to get around without causing prices to rise.

But crushing demand ranks somewhere between unpleasant and agonizing. When the Fed pressed interest rates to double-digit levels in the early 1980s, in an attempt to reduce rapid inflation, it sparked brutal successive recessions that pushed the unemployment rate to nearly 11 percent. (Currently, the percentage is at a historically low 3.6 percent.)

This grim historical example has led some labor-focused groups to call a more holistic response to today’s price increases, which are the result of both strong demand and disrupted supply.

The White House and Congress could help boost output in key parts of the economy by offering relief from offering the inflation equation.

The problem is partly in time. While the government can try – and is trying – to help build more affordable housingfor example, these policies take some time to take effect. While they help, consumers and businesses may have begun to expect rapid inflation. And with prices, expectations can be met on their own: workers who expect higher rental and food bills may demand higher pay to cover those costs, prompting their employers to raise prices to cover rising labor costs and trigger an inflation cycle.

This is one of the reasons why the Fed is intervening with its painful but faster tool.

Last week, the Fed raised interest rates with the biggest increase since 1994, while signaling that it expects grow them more this year than throughout the economic expansion that stretches from 2009 to 2020.

Even if it doesn’t cause a complete recession, the Fed’s approach is expected to hurt and is already doing so tanking of stocks. But officials say that if inflation remains uncontrollable, it would be worse, in part because it would be fuel insecurity and hurt low-income people with limited room for maneuver in their budgets.

For the past two years, PS 11, a Brooklyn elementary school, has struggled to move its music program online just as the pandemic cut short critical years for children’s musical development.

Novice musicians were content with their exercises in their living rooms, on their fire escapes, in the basements of their grandparents. Those who left their tools at school watched from the sidelines as their peers tried to keep up with each other through Google Meet.

Now the music is back in PS 11. At a recent rehearsal, despite the creaking of the clarinet and the occasional bleating of a deceptive saxophone, almost every student was smiling, Sarah Diamond told The Times. “It’s not about trying to create a little Mozart,” said Roshan Reddy, the group’s director. “It’s about students finding their own strength.”

See the PS 11 group in action and hear from the students. – Natasha Frost, author of briefings

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