SAN ANTONIO – We’ve all felt it -- the heavy weight of paying more for necessities like groceries and fuel. Inflation is a term with a relatively simple definition, but dealing with it is far from easy.
First, what is inflation?
Sir Thomas Tunstall with the UTSA Institute for Economic Development says, “the short answer is rising prices.”
“It’s not a one-month blip in prices but a continual increase in prices,” said David Macpherson, an economics professor at Trinity University.
The Consumer Price Index says breakfast items like cereal are up 13% compared to last year. Eggs are up nearly 11%. Gas was up by 50% in mid-summer.
So what got us here?
The answer lies within a time we won’t soon forget -- the COVID-19 pandemic. On March 13, 2020, a state of emergency was declared nationally at the state and city levels. On March 23, 2020, the city of San Antonio enforced a stay-at-home order.
With everyone stuck at home, cash flow around the country was severely low. The federal government stepped in to try and fix the spending lull with stimulus checks.
The first stimulus check came out in March 2020, worth $1,200. The second was given out in December of 2020, worth $600. These checks helped some people cover lost wages and pay for things they otherwise couldn’t. The final check came in March of 2021 to the tune of $1,400. “The stimulus package that came out of $1.9 trillion that Congress passed was too big. And how it was basically paid for was by printing money,” says Macpherson. He says, “The problem was, was our economic output shortfall. By the time they passed, the $1.9 trillion was about half a trillion. So we’re short half a trillion. But then you spend $1.9 trillion. That’s too big of spending.”
Think of the economy as a giant fish tank. The water represents money flowing within the economy. During the pandemic, the water level got too low because nobody was spending money. The government added more by sending out checks. But if you add too much water to a fish tank, it overflows. “If you print too much money, you get inflation,” Macpherson said.
Cash flow is only part of the equation. Goods and services weren’t flowing either because of the pandemic. For months, shipping ports worldwide were backed up, leading to a delay in products making it to shelves.
“A lot of it is supply chain related. The fact that the ports of ports, in particular the ports of Los Angeles and Long Beach, where most of the containers come into the U.S., 40% of the goods imported by the U.S. come in through those two ports. And with COVID, they’ve had trouble keeping staffing levels up, keeping the goods flowing,” said Tunstall.
In addition, the U.S. had a hard time getting computer chips for cars and computers. In the grand scheme of things, there was more money in the economy than items to spend it on. It led to price increases on the things that were available.
War in Ukraine
Then came the war in Ukraine. Russia invaded Ukraine in February 2022. That strained the global oil markets as countries tried to hit Russia where it hurt. Tunstall said, “because of U.S. sanctions, or I should say more generally, NATO sanctions, that, you know, there’s a desire to punish the Russians for their invasion of Ukraine, it’s not clear how effective some of those sanctions are.”
The Consumer Price Index
All of these factors combined have led to the 8.5% inflation rate America is facing today, according to the Consumer Price Index (CPI).
The CPI is a record kept by the Bureau of Labor Statistics to show how prices of items change from month to month.
“Crude oil or raw steel or commercial real estate, none of those things are in the CPI, but gasoline, bananas, your rent that you pay -- all those things are,” said Steve Reed, an economist for the Consumer Price Index. Every month, the CPI looks at 60,000 to 80,000 prices on a range of items from 75 locations around the country.
“That gives us this big pile of prices. And then we take that big pile of prices and sort of compare it to the previous pile of prices and see how much they’ve gone up,” Reed said.
The CPI reports Americans paid an average of $3.25 for a gallon of whole milk in July 2020. A year later, that price was up to $3.63. Today, the average is $4.15.
Find prices of items in the Consumer Price Index by clicking this link.
The CPI is not only used to help you understand what is costing more. It also helps businesses make decisions.
“Maybe landlords are using it to raise their rent or bosses who are using it to give their employees raises or people in the financial world who are interested in what’s happening with inflation,” said Reed.
Social Security recipients also get a cost of living adjustment yearly based on the CPI.
The Federal Reserve
The current inflation rate of 8.5% is the highest America has seen in 40 years. The Federal Reserve has taken steps to try and fix it by raising interest rates.
The Fed has raised rates twice this year, resulting in the current range of 2.25% to 2.5% interest. Their goal is to discourage people from borrowing and spending money.
“The belief is that the economy is running too hot, that there’s too much demand, and we need to sort of quell that demand. And rising interest rates will do that,” said Tunstall.
It could take time to see the progress, though.
“It’s not like instantaneously when the Federal Reserve raises interest rates -- immediately the economy slows down. It’s like driving a supertanker, right? Takes time to make a turn to the left or the right,” said Macpherson.
One question on many people’s minds is “Could we see a recession soon?”
“The track record of trying to avoid recessions by the Federal Reserve when they’re trying to reduce inflation is not good,” Macpherson said. “A so-called soft landing where you reduce inflation without causing a recession is a rare event. It’s often a hard landing where you get a recession, so the odds are soon we will be in a recession.”
San Antonio may have something working in its favor to avoid the severe impacts of a recession, and that is a strong local economy.
Economists say the city’s current economy is not what it used to be.
“San Antonio, its economy is much more than Military City USA or, you know, a tourism destination center,” Tunstall said. “It’s much more than that now because there’s aerospace, there’s health care, medical, a whole host of financial services, a whole host of other industries that that sort of buffer the economy, can buffer the economy somewhat in a recession.”