Why Is the Inflation Rate Rising In The USA?

The USA's Labor Department has recently reported that retail inflation (Consumer Prices Index - CPI) had climbed up to 6.2% in October.

Inflation rate

The country has been dealing with a much higher headline inflation rate since last year, as an immediate impact of the pandemic. In this year, May, the USA had reported a 5% surge in CPI inflation, YoY. The USA Federal Reserve was trying to control this surged rate but has failed.

Inflation rate target

The present inflation rate is the highest in the past 31 years. The US Fed was trying to keep the rate under 2%, but in reality, the economic situation headed south due to multiple factors. This is a massive concern for the country's citizens and analysts.

Supply chain bottlenecks as one of the key reasons

Supply chain bottleneck or a significant fall in supply in the economy is being identified as one of the key reasons behind this inflation rate. After the hit of the second wave of Covid, demands by the citizen started to ease and got improved. Liquidity infusion in the economy by Fed supported the demand front significantly. Along with that, Fed has been buying $120 billion of worth government-backed bonds, monthly. Additionally, the vaccination drive helped the population to get back to their works. So, with increased demand but a poor supply chain, the balance could not be maintained. The supply chain across the country and globally were bent out of shape. Hence, the CPI inflation surged. CPI is the rise in prices of multiple consumer products in the economy.

The flipside of the coin

Some economists and analysts are thinking that the government's liquidity infusion has contributed to this hike in inflation. As a reason, they are pointing out that, because of the Fed's monetary policy, demand has recovered significantly, but the central bank has failed to ease the supply chain. Many companies had curtailed their employee strengths and reduced production volumes, making a challenge for the supply system. Fed should focus on that now, to keep these sectors running again smoothly, at the pre-pandemic level.

Interest rate

Analysts are also thinking that without an interest rate hike by the Fed, inflation is not going to be controlled soon. Inflation now is making the asset market including gold bullish in the international markets. But the Fed is not so confident about the economic recovery and employment scenario, and does not want to impose a higher interest rate any time soon. The present interest rate is nearly zero, which can also be considered as a reason behind this high inflation rate.

(Also read: USA CPI Inflation Soared 6.2%, Stock Markets Under Pressure, Assets Rise)