How Inflation Can Impact Your Startup

In 2021, the US Consumer Price Index (CPI) rose 7%. That means that the basket of goods considered typical of a US consumer, including food, healthcare, and transportation, is more expensive today than it was a year ago. Compared to last year, food prices have risen 8.3%, healthcare costs 6% more, and used cars (a form of transportation) are 29.7% more expensive. This overall rise is the highest the US has seen in 30 years. While other countries are also seeing inflation, America currently has the 8th highest rate in the world.

What causes the inflation America is seeing today? There are 2 major theories economists offer regarding how inflation occurs, and both are applicable to the current situation. The first theory is cost-push, and it states that higher prices come from higher input costs on the producer’s end. It is true that the cost of many input materials (like timber) have risen. Additionally, supply chain breakdowns make it more expensive for companies to ship goods from one side of the world to the other. Because making the product and bringing it to market cost more, companies pass on as much of the price increase as they can onto consumers in order to maintain profit margins.

The second theory surrounding inflation is demand-pull. Ever since pandemic-era lockdowns ended, US consumers have demanded more goods than the system can provide. Purchases put off during lockdown returned with a vengeance. A notable example is housing prices; all over the country, houses have been selling at alarming rates due to pent up demand.

The Federal Reserve is one of the main bodies in charge of keeping US inflation under control. In a typical year, they aim for an inflation rate of 2% or lower. The 2021 number is more than 3 times that. There are a few strategies the Fed can pursue to cull inflation. They can reduce the amount of money in circulation. One way to reduce the money supply is to incentivize investors to buy more bonds. Another tool at the Fed’s disposal is interest rates; if they raise rates through the central bank, interest rates all over the country will rise in tandem. By making the cost of borrowing higher, fewer people will attempt to borrow money, which slows down the rate of purchases happening in the economy.

However, there are a few things the Fed has to watch for as they restrict inflation. Higher interest rates from the Fed were a link in the chain of events that caused the 2008 recession. Having just come out of a pandemic-induced recession, the Fed will not be eager to cause job losses again.

It is a shame to workers seeing the first significant wage growth for over a decade that inflation is eating their earnings away. Average hourly wages rose 5.1% in 2021, yet the pay raise isn’t enough to maintain a standard of living. People must invest in risky securities to protect their money.