What Should the U.S Do to Prevent Inflation?

What Should the U.S Do to Prevent Inflation?

Written by: Tyler Novak

Over the course of the last year, prices have been on the rise. Everyday groceries have seen an overall 8.8% increase in price, Gas prices are up around 38% from a year ago, and U.S citizens have been seeing an overall increase in frustration. Inflation has been on the minds of many Americans and needs to be addressed much better than it has been. If the government wants to fix the extreme inflation, there are two main plans they need to consider: raising interest rates and increasing production in the U.S. In order to understand why these plans would help lower inflation rates, it must be understood why the current inflation rates are so high. 

It all began with the COVID-19 shutdown in 2020. While there are many different factors contributing to the high inflation rates, this is a condensed summary. Prior to the shutdown, many consumers spent a lot of money on services, but due to the shutdown, focus was shifted to products. Combining this increase in demand with the struggles manufacturers were going through due to COVID-19, there was a great recipe for inflation. A higher demand for products in which there are fewer makes the producer need to increase the price. Looking at the supply and demand curve shown to the right, once demand is at its peak with the fewest quantity, the price will be at its highest (representing the situation the U.S has been going through). Coming out of the pandemic, the majority of consumers had more money in their bank accounts because of the money the government pumped into the economy with stimulus checks and the lack of spending during the shutdown. While one may think this spending would be good and help economic growth, the global supply chain has still not returned to pre pandemic production levels. Overall causing a scenario where demand is high, quantity is low, and prices are on the rise. 

Currently, consumers are the driving factor of inflation. One way to discourage consumer spending would be to increase the interest rates. Increasing interest rates makes taking out loans more expensive and harder to receive, it would make businesses spend less on expensive equipment, and overall, consumers would be looking to save their money. According to Investopedia, between 1980 and 1981. Inflation was at 14% and the Fed raised interest rates to 19%. This caused a severe recession, but it did put an end to the spiraling inflation that the country was seeing. While higher interest rates can lead to higher unemployment rates and an overall lower economic output, our country can still recover. With inflation, it is much harder to recover the spending power of the U.S dollar. 

Not only should the U.S look to decrease consumer demand, but they should also look to increase supply. The best way to do so would be to increase the production based in the United States. This may seem like a tall task, but it has been done before. In 1940, President Franklin D. Roosevelt demanded that our aircraft industry which had produced only 3,000 planes the year prior to produce over 50,000 that year. To do so, he built factories all over to produce different war time materials. Roosevelt also built neighborhoods, schools, hospitals, and powerlines all near these factories to help accommodate for these workers. The U.S after this era became the world's “arsenal for democracy” and continued to produce at a high rate. Since then, the U.S lost that edge on the world when they began outsourcing more and looking for imports. If the United States wants to squash the inflationary rate, they must invest a copious amount of government spending into manufacturing. This will thwart the supply chain issues allowing for the supply to once again meet the demand. 

Works Cited

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“How Interest Rates Affect the US Markets.” Investopedia, https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp. Accessed 25 April 2022.

Stein, Jeff. “12 inflation ideas from experts.” The Washington Post, 26 January 2022, https://www.washingtonpost.com/us-policy/2022/01/26/inflation-white-house-experts/. Accessed 25 April 2022.

Stewart, Emily. “What is causing inflation and how to fix it, explained to the extent possible.” Vox, 28 March 2022, https://www.vox.com/the-goods/22994731/inflation-rate-russia-gas-prices-jerome-powell. Accessed 25 April 2022.

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WISEMAN, PAUL, et al. “US inflation jumped 8.5% in past year, highest since 1981.” ABC News, 12 April 2022, https://abcnews.go.com/US/wireStory/sticker-shock-march-inflation-set-40-year-high-84026855. Accessed 25 April 2022.