Federal Reserve’s Inflation Response: Prices Rise, Wages Decrease

The U.S. stock market’s worst quarter in the past two years was reported March 31, 2022. The end of March marked a period in which the fewest individuals since the start of the COVID-19 pandemic invested in the stock market. This quarter, the standard value of the S&P 500 index dropped 4.9 percent. This index gives an estimate on the capacity of large companies listed on the US stock market based on the amount of shares available in the top 500 companies, meaning that investments have decreased even in the most prosperous businesses. Additionally, the Nasdaq Composite, which is an index that takes into account 3000 stocks, including American depositary receipts and real estate investment trusts, has dropped 9.1 percent. Despite this, consumer and material prices have continued to rise, resulting in extreme levels of inflation.

That said, the Federal Reserve has placed much of its energy into handling current inflation, which is at its highest level of the last 40 years. The Federal Reserve plans to raise interest rates, which some fear will provoke an economic recession. Specifically, Fed officials are considering raising interest rates by half a point, instead of the usual quarter point. Although most Fed policymakers are on board with this decision, they have not yet raised interest rates due to the uncertainties resulting from the Russian-Ukrainian conflict. The Fed also plans to handle the inflation by tapping into its $9 trillion reserve, which is money held for financial emergencies. Taking money from the Reserve means that borrowing costs, such as credit card payments, will increase.

Although the end of March 2022 marks the worst quarter in the stock market since the start of the pandemic, inflation was almost entirely brought on by the pandemic. Due to COVID-19, travel and transportation restrictions were imposed worldwide, resulting in a supply chain crisis. Prices rose for imported foods entering the U.S. Notably, the price of meat, poultry, fish, and eggs rose 13 percent from February 2021 to February 2022. In addition, since April 2021, real wages have been progressively decreasing. Real wages change based on inflation, so the inflation in the U.S. is growing at a pace which wages are not keeping up with. In other words, products in the U.S. are getting proportionally more expensive when compared to salaries.

In general, low income families in the U.S. spend a large fraction of their income on gas, food, and energy. Russia and Ukraine are major exporters of oil, grain and fertilizer to the U.S., so along with a rise in the price of food, the price of oil in the US has risen by more than 11 percent since the start of the war. If American families spend more money on these essential products, they will have less money to buy items that are considered to be non-necessities. Non-essential items make up a considerable part of the economy of the United States, so a decline in consumer spending significantly dents the economy.

Luckily, throughout the COVID-19 pandemic, some households received stimulus checks and reconsidered the ways in which they would normally spend their money, allowing households in the U.S. as a whole to handle this crisis with greater success than in previous crises. However, while American citizens are attempting to live through this constant rise in price of essential items, some people are beginning to reach their breaking points. Strategies such as stimulus checks are just band-aids used to temporarily cover an ever-growing problem of inflation partnered with a decrease in real wages, and the government must consider other ways to keep costs of goods low for the foreseeable future.

By Carolina Tieppo