JoshInflation is a significant economic force that can cause widespread changes and negatively impact various sectors. This pressure results from the increase in prices across the housing, healthcare, and education sectors. Finance expert Kavan Choksi notes that the pressure to keep up with customer demand frequently gives rise to the production of more items or a hike in prices when supply is scarce. Inflationary forces due to supply and demand cause noticeable changes in the economy. These changes often lead to tough choices for decision-makers, as they must navigate a delicate balance between production and pricing that stays competitive and viable in today’s market. Effective management of the inflationary forces is critical for the economy to operate successfully and adapt to customer needs over the long term.
What are the Inflationary Pressures that affect the economy?
The effect of the inflationary pressure curve is quite similar to that of inflation. It is influenced by a range of variables, such as fiscal and monetary policies drafted by the government. Essentially, these policies can be purposefully handcrafted to either increase or reduce inflationary pressure.
For example, increasing taxes or tightening up monetary policies can lead to reduced spending and inflationary pressure. Conversely, loosening up controls can spell trouble and result in high inflationary pressure. Kavan says navigating this delicate balance between policies and their effects becomes an imperative task for the government. It is through such efforts that the government can ensure inflation rates remain under control to protect the economy and promote overall well-being.
Demand-pull inflation is another inflationary pressure that affects the economy. It is a phenomenon that is caused by an excessive demand over a short supply of goods or services. This type of inflation can have significant economic consequences for both individuals and countries alike. A classic example of Demand-Pull Inflation occurred after the Second World War when the demand for goods and services surged high. Unfortunately, countries could not fill the inflationary gap between them — ultimately leading to inflation.
Kavan mentions that cost-push inflation is a situation where the cost of production suddenly increases, leading to a rise in the price of commodities. The rise in cost can come from a variety of sources, such as the sudden increase in prices of raw materials, a hike in wages or salaries, changes in production technology, or an increase in taxes. When these factors occur, businesses are forced to raise the prices of their goods and services to cover their costs. It ultimately increases the general price level of commodities, leading to inflation. Cost-push inflation can be very challenging for policymakers to curb effectively, as it is not demand-driven.
Inflationary pressures in the Housing Sector
Housing has become a significant contributing factor to inflation in recent years, with its share in the consumer basket of items measured in CPI rising to a staggering one-third. Even the slightest uptick in housing costs can have a disproportionate impact on inflation. As of June 2022, housing accounted for a fifth of inflation, contributing 1.7 percentage points to this metric. By March 2023, housing’s contribution to CPI inflation increased to a noteworthy 2.6 percentage points, accounting for half of annual inflation rates (source: THE WHITE HOUSE). The pre-pandemic norm saw housing contributing approximately one percentage point to inflation, but these numbers have intensified in recent times.
In recent months, the housing market has seen an increase in both internal migration and work-from-home arrangements as a result of the pandemic. Kavan says this has had a significant impact on the demand for housing and the types of properties that are being sought after by working-age families. With the flexibility that comes with being able to work from home, many are looking to move to areas where they can find more space and more suitable housing options. It has led to an increase in demand for properties that offer more space and functionality. While it is uncertain how persistent this shift in demand will be, it has been exacerbated by long-running housing supply constraints in some metropolitan areas, which have only served to push up prices even further.
Addressing the ongoing housing crisis in the United States, the Biden Administration has taken a bold step toward making affordable housing a top priority. In an effort to increase the housing supply, the administration has introduced the Housing Supply Action Plan.
This plan offers incentives for land use and zoning reform, ensuring that affordable housing units can be built in areas that need them most. Additionally, the President’s latest Budget proposes a staggering $175 billion in housing investments over the next decade. These investments will fund critical initiatives like new construction, modernization of existing housing supply, and rental assistance programs. With these new initiatives, the Biden Administration is poised to make a positive impact on the availability of affordable housing in the United States.
Inflationary pressures in the Healthcare
The cost of medical care has historically seen a rise in prices that outpace inflation in the rest of the economy. However, recent years have seen an overall increase in consumer goods and services at an unusual pace, with inflation rates reaching a four-decade high in mid-2022.
In light of these trends, it is important to take note of the specific sectors within medical care that are experiencing the greatest rate of price growth. According to an updated analysis, it appears that prices for outpatient care and hospital and related services are currently rising at a faster rate (5.7% and 4.2%, respectively) than those for prescription drugs and physician services (3.1% and 0.5% respectively). While all goods and services increased by 3.0% between June 2022 and June 2023, medical care prices only increased by 0.1% (source: Peterson-KFF Health System Tracker). This information adds valuable insight to the ongoing conversation around the increasing cost of healthcare and the ways in which it is affecting consumers across the United States.
The recent release of the White House state fact sheets highlights the potential cost savings for Americans under the Inflation Reduction Act. Kavan explains this landmark piece of legislation offers Medicare the authority to negotiate prescription drug prices, providing relief for millions of people across all 50 states and the District of Columbia.
Moreover, the Inflation Reduction Act places a yearly cap of $2,000 on out-of-pocket prescription drug expenditures for Medicare beneficiaries. This new law will also generate substantial cost savings in health insurance premiums for consumers, freeing up funds for other necessities. The act aims to reduce the influence of the pharmaceutical lobby, a highly effective special interest group, and safeguard gains made under the Biden-Harris Administration to expand access to reasonably priced healthcare. As a result, the uninsured rate in the United States has dropped to historic lows, and the new act ensures this trend will continue.
Inflationary pressures in Education Sector
Inflation is a major issue affecting the education sector, and it is causing prices to skyrocket for essential needs such as uniforms, textbooks, tuition fees, and transportation costs. Kavan points out that rising prices are making it increasingly difficult for common families to afford their children’s education. The consequences of these challenges are widespread, and parents all over the world are struggling to manage the escalating fee structures and related educational expenses. The rapidly increasing cost of education at the primary, secondary, and higher levels is having a profound effect on families’ financial situations and making it hard to secure a better future for their children.
Today students find themselves struggling to balance their limited budgets, which are mostly consumed by everyday essentials like food, personal care, drinks, travel expenses, and so on. It often leads to a strain on their ability to meet the ever-increasing education expenses. The problem becomes even worse when it comes to private colleges, which offer inflated fees to promise placement in top companies once the course is completed. These high tuition fees put a strain on ordinary students who have to find other avenues to fund such high-profile degree courses in areas like engineering and medicine.
The Biden-Harris Administration is working to ensure that every student has the opportunity to access higher education. To achieve this goal, they have implemented new measures to support the nation’s colleges and universities. One of their significant efforts has been securing a substantial increase in Pell Grants, which provides crucial financial aid to low-income students.
Additionally, the administration has prioritized college completion by advocating efforts to improve postsecondary outcomes, particularly for those facing significant barriers to accessing and completing college. Congress has established a new Postsecondary Student Success Grant program in response to the President’s budget, providing direct support to institutions to engage in evidence-based activities that encourage college re-enrollment, retention, and completion among those close to graduation. With a focus on improving higher education, Kavan emphasizes the administration is creating pathways to upward mobility for l students which could allowg them to thrive in the American workforce and the nation’s military.