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August 18, 2021updated 09 Mar 2022 7:07am

US inflation soars to 13-year high as Covid recovery continues

By MarketLine

The US recorded its highest inflation rate in 13 years of 5.4% in both June and July. This was largely in line with forecasts of 5.3%. Typically, the ideal inflation rate is around 2%.

Pressure on supply chains has led to a surge in prices, while the pandemic has also boosted inflation. Recent inflation spikes in advanced economies have been described as ‘transitory’ by many economists i.e., temporary due to large stimulus packages and government aid.

Supply constraints drive prices higher

Inflation in the US has largely been attributed to supply constraints of raw materials and labor. This has meant companies competing for resources, resulting in price increases across various industries.

Supply limitations are evident in the semiconductor shortage, where car makers and electrical appliance manufacturers are competing for the same components. This is leading to soaring prices.

Further pressures on the supply-side are found in the transportation of goods. Research from ING finds that supplier delivery times rose to their highest since 1974, illustrating the difficulty manufacturers are facing.

Supply has further been diminished by employee shortages. Many employers are struggling to fill vacancies as employees, buoyed by unemployment benefits and stimulus packages, demand better pay, conditions, and flexibility. Supply chains have felt the impact, causing prices to rise further.

Covid-19 induced inflation

The largest increases in price have been recorded in the used car market and airfares. Both can be traced directly to the pandemic.

Many US consumers remain wary of using public transport and resultingly have turned to second-hand cars to commute privately. In the second quarter of 2020, the average used car price was up 21% year-on-year, the highest increase since records began.

With the pandemic temporarily eliminating the possibility of vacations for many, air travel is now in high demand. In May, airfare prices were up 24% year-on-year according to CNN.

Republicans blame Biden for inflation

President Joe Biden has passed many large spending bills aiming to boost economic recovery post-pandemic, recently passing a $2tn bill in March. This, the Republicans claim, has led to record inflation, undermining the US Dollar, and lowering purchasing power.

The Republicans will likely utilize the inflation figures to inhibit further Democrat spending as fears of sustained high inflation mount. This may mean slashing of the proposed $3.5tn bill that will aim to expand Medicare, fund climate-change initiatives, and invest in the care economy.

Democrat economic advisors have said that such inflation concerns are unreasonable as the proposed bill will pledge spending over many years and will not be one injection of cash into the economy, dampening any inflationary concerns.