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Are crushing prices really Putin’s fault?

The Labor Department’s March report on inflation showed that the Consumer Price Index (CPI) was up by 8.5 percent over the past year. The core CPI, which excludes highly volatile energy and food prices, was up 6.5 percent over the past year. Anticipating the spike in inflation, the Biden administration blamed the Russian war in Ukraine for the surge in prices. A closer look reveals this not to the case.

Energy prices surged by 32 percent over the past year. Yet, energy prices have been increasing for well over a year. For example,  gasoline prices have been on a steady rise since November 2020, when the effect of the stay-at-home COVID-19 orders, which suppressed travel, were long gone. Placing the blame on the Russian attack of Ukraine is misguided, and simply not true. The war certainly has not helped keep gas prices down, but to explain it in such a way is disingenuous. 

But energy is not the only components of the CPI that showed sharp increases. Food prices, which surged by 8.8 percent over the past year, directly impacts everyone, particularly low-income Americans, who spend a larger share of their paycheck to feed their families. Food at home alone showed a 10 percent increase over the past year. When low-income Americans must use a larger share of their income on core necessities like food, shelter, energy, transportation, clothing and medical care, any unexpected expenses create a snowball effect of uncertainty that affects the well-being of everyone in a family. 

With higher prices, higher wages are needed to keep up buying power. Yet, wage increase rarely keep up with inflation

The takeaway from the significantly elevated CPI is that Americans are seeing price increases that have not been experienced for over four decades. The biggest concern is how long this will continue, and what can be done to bring inflation back under control. 

Unfortunately, no one knows how long this will last. Crystal balls are rarely accurate and getting any consensus from economists is difficult. A plethora of economic data is available but using such data to predict the future is an inexact science at best.

To bring inflation under control, the Federal Reserve has begun to raise interest rates, which will need to be continued for the rest of 2022, and possibly well into 2023. How high interest rates will need to go is also anyone’s guess.

Of even more concern is the national debt, which will require higher payments to service as interest rates climb. This also means that interest rates for unsecured debt like credit cards will increases, as will home mortgage loans, with 30-year mortgages recently topping 5 percent, after being below 3.20 percent throughout 2021. With unprecedented house price increases and higher mortgage rates, fewer people may be able to afford to enter the housing market, which could temper housing prices over the next year. 

Given the massive infusion of stimulus money used to stabilize the economy during the early period of the pandemic, the price to be paid for such spending is now being paid by every American at the gas pump, at the grocery store, and at the retail outlet. There are no “free lunches,” so when money is spent in one way, someone must pay the price for such expenditures in other ways. 

This is a whole new world for most Americans, who never experienced the Reagan-era inflation that we are poised to revisit in the next few years. How well this will be digested remains to be seen. What is certain is that everything we use and enjoy will cost more. 

Sheldon H. Jacobson, Ph.D., is a founder professor of computer science and the Carle Illinois College of Medicine at the University of Illinois at Urbana-Champaign. He applies his expertise in data-driven risk-based decision-making to evaluate and inform public policy.

Tags Biden Joe Biden Sheldon H. Jacobson Vladimir Putin

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