The Inflation Rate in the U.S.: Past, Present, and Future
The inflation rate in the U.S. has surged, reaching 7% year-over-year in December 2021. This marks the highest level in 40 years.
In this graphic from New York Life Investments, we look back at historical inflation—and where experts think it may be headed next.
What is Inflation?
Before we dive into the data, let’s take a look at what inflation means. Inflation measures how quickly the prices of goods and services are rising. Moderate price growth is generally a sign of a healthy economy. As the economy grows, consumer demand increases and prices go up.
There are two types of inflation.
- Cost-push inflation: Production costs, such as materials and wages, increase. Supply declines due to higher costs, and businesses pass costs on to the consumer through higher prices.
- Demand-pull inflation: Consumer demand surges. Supply declines due to higher demand, which means consumers are willing to pay more and prices rise.
We are currently experiencing both cost-push inflation and demand-pull inflation. This is different from the other inflationary periods over the past 50 years, where rising energy prices led to cost-push inflation.
The History of the Inflation Rate in the U.S.
We measured inflation using data from the Consumer Price Index, which measures the change in price that urban consumers pay for a basket of goods and services. The data shows the year-over-year change from December of the prior year and is not seasonally adjusted.
Here’s what the inflation rate in the U.S. looked like from 1965 to 2021.
There are a number of periods in history where the inflation rate in the U.S. was heightened. For instance, a booming economy in the late ‘60s led to rising prices. President Nixon implemented wage-price shocks to halt inflation, but this eventually caused a recession.
In the years that followed, surging oil prices were a primary culprit behind periods of higher inflation. The early ‘70s were impacted by the oil embargo, when OPEC countries stopped oil exports to the United States. At the same time, U.S. oil producers didn’t have additional capacity and non-OPEC oil sources were declining as a proportion of the world oil market. This meant the U.S. was unable to increase supply to meet demand, and OPEC countries had more power to influence oil prices.
Fast forward to 2021, and the COVID-19 recovery has again led to a higher inflation rate in the United States. A number of factors are responsible, including surging consumer demand, supply chain problems, and a labor shortage.
Inflation During a COVID-19 Recovery
Amid lockdown restrictions, demand for goods increased dramatically. It remained high even after demand for services recovered. Compared to February 2020 levels, demand for goods in December 2021 was 22% higher.
To make matters worse, business inventories are at record lows. Retailers can cover just over one month of sales from existing inventories, down 25% compared to February 2020. Not only that, there is a severe labor shortage. Total private job openings increased from 6.2 million in February 2020 to 9.6 million in November 2021.
The lack of supply is leading to higher material and wage costs for businesses, with some categories hit particularly hard. For instance, the price of used cars and trucks has risen over 37% as the semiconductor shortage hampers the production of new vehicles.
Forecasting the Inflation Rate in the U.S.
Over the next few years, various institutions expect the inflation rate in the U.S. to stabilize.
|U.S. Federal Reserve
Note: The OECD and IMF measure inflation with the Consumer Price Index (CPI), whereas the U.S. Federal Reserve measures inflation using Personal Consumer Expenditures (PCE).
To combat inflation, the Federal Reserve is looking to raise interest rates. This encourages people to spend less and save more. It has also begun tapering asset purchases, which is intended to reduce spending by lowering the amount of money in circulation.
However, for inflation to moderate near the 2% target, issues beyond consumer demand—like supply chain hiccups and labor shortages—will also need to be resolved.
»Do you want to protect your portfolio against inflation? Learn which asset classes have beat inflation in recent years.