Inflation risks are generally associated with a lagging supply of goods or services. The consumer price index (CPI) and personal consumption expenditure deflator (PCE) show the inflation rates in the United States over a 30-year period, from 1969 to 2021. Some observers have noted similarities between today’s inflation and that of the 1970s, but the current level of inflation is still well below those levels.

Supply bottlenecks

Despite recent improvements in supply-chain performance, a prolonged period of inflation is likely to pose a series of new challenges. The New York Fed’s Global Supply Chain Pressures Index is at elevated levels. China’s COVID-related lockdowns are expected to persist, putting upward cost pressure on global supply chains.

Tighter reserve management

Paul Volcker, a former president of the Federal Reserve Bank of New York and now chairman of the Federal Reserve Board, made this decision when year-over-year inflation was at 11 percent and national joblessness was just below six percent. He felt that greater control of the growth rate of broad money and reserve balances would be needed to combat inflation. He had already started setting monetary aggregate targets but he wanted to take the measures even further.

Higher interest rates

A prolonged period of inflation can lead to higher interest rates, which will make many financial products more expensive. This includes car loans, mortgages, student loans, and credit cards. In addition, higher interest rates can increase debt levels.

COVID-19 pandemic inflation

The spread of the COVID-19 virus has led to a major shift in demand from services to goods. As a result, there is an excess supply of face-to-face services, but a shortage of digital-related goods. This mismatch, known as stagflation, pushes general prices upward.

Consumer sentiment

Consumer sentiment measures the way consumers feel about the economy. It takes into account consumer expectations about the short-term economic health and the long-term prospects for economic growth. During the mid-20th century, consumer sentiment became a statistical statistic and began to influence public policy. This indicator is important to monitor because consumers make up the bulk of the economy’s GDP. When consumer sentiment is high, consumers are more likely to spend money, while if they are pessimistic, they will conserve money and make fewer discretionary purchases. High consumer sentiment can negatively impact economic growth and affect the stock market and employment opportunities.