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What Is Inflation, and Why Is It Different in Today’s Economy?
How the jobless rate, technology, and the pandemic distinguish the current situation from the 1970s
As the Federal Reserve raises rates, fears of a recession are taking hold on businesses and individuals alike. Yet an economic slowdown may be the only answer to rising inflation and supply chain backups.
With inflation at a 40-year high, it’s evoking memories of America’s Great Inflation of the late 1970s, which was characterized by stagflation—a combination of high inflation and low growth. But, today’s economy is not like past high-inflation periods. History repeating itself isn’t likely because of how dramatically technology has changed modern life from a half-century ago.
“The pandemic came along and many of us managed to keep our jobs and even thrive as we shifted to a remote work environment. It's just one thing that helps you realize that the economy today is completely different than your dad's economy from the 1970s,” said former CNBC Chief Economist Dr. Marci Rossell.
The economic expert joined Haworth Connect to offer guidance through the perilous waters of the 2022 economy.
What Is Inflation?
Inflation is defined as too much money chasing too few goods. The current situation follows heavy federal spending the past two years to stabilize the economy during the pandemic. The numbers show that year-to-year inflation was 9.1%, as measured by the consumer price index in June of 2022. Gas and food prices have shot up. But while inflation is the highest since the early 1980s, unemployment is very low at 3.6%, indicating the economy still appears to be creating jobs.
A more telling sign is that most Americans feel the economy is headed for a downturn, which is tightening their spending. “They believe we're in a recession, even if we're really not,” Dr. Rossell said. “So, in some ways—even if you don't have a technical recession—certainly, you have an emotional recession on your hands.”
Inflation is a global issue. One reason is that it’s driven primarily by supply chain disruptions and rising commodity prices that are impacting the entire world. “When you have complex issues like the inflation that the globe is facing, it's never just one thing,” Dr. Rossell explained. “It's been driven not just by monetary policy in the US, but loose monetary policy everywhere—along with supply chain constrictions everywhere.”
The US economy generally grows on average around 2% annually, but it has slowed down to less than a half-percent. Forced to spend a larger percentage of their income on necessities, the poor are bearing the biggest hardship of inflation.
COVID-19 Has Altered Economy
Another COVID-19 trend impacting the economy is that flexible and hybrid working styles are the new normal, with shifts that include work from anywhere and four-day work weeks.
In the big picture, this change reflects increasing standards of living and the fact that people can work fewer days on flexible schedules to maintain their standard of living. Dr. Rossell notes that a century ago, most people were putting in six-day workweeks. And that was an evolution from past centuries when most people were forced to work seven days a week at a workplace outside their home to survive.
Priming the pump is that younger workers are acclimated to working remotely because of their college experience with distance learning during the pandemic. And there haven't been Friday classes in most universities for quite some time, leading to expectations of—and comfort with—a four-day work week.
This change in schedule and the flexibility to work from home some or part of the time is fueling another economic trend. Millennials who once poured into city centers are following the pattern of previous generations. As they are getting married and starting families, they head out to the suburbs to buy larger residences at a lower cost.
“I think a lot of cities are going to struggle with that reality,” Dr. Rossell said. “Young people are moving out to the suburbs and starting families with the knowledge that they're going to be doing more remote work than was done five years ago. They need more space, and they need better space. And sometimes they can live farther from the job because they're only going to go back there one or two days a week.”