Why Cost Of Living Is So High?
Making Sense of the Federal Reserve’s Tactics for Controlling Inflation
Everything’s getting more expensive at an alarming rate. In all countries, the standard of living has been going down.
“Unprecedented price surges mean that for many people across the world, the food that they could afford yesterday is no longer attainable today,” says UNDP Administrator, Achim Steiner.
It’s hard to explain what he means by Unprecedented price and I wish he’d use words as they are. It’s like he’s saying “Prices are so high that everyone’s getting poorer”
Basically, I’m trying to explain why everything is getting more expensive these days. As a result, you’ll understand what’s going on, which in turn will help you get over any fears you may have. You might want to adjust your expectations to what’s going to happen as well.
What we will go over:
- How inflation lowers the purchasing power of money and causes prices to rise faster than wages
- The cost of money, including interest rates, fees, and other costs associated with borrowing funds
- The effect of currency depreciation on imports, making them more expensive
- How the Federal Reserve works to control inflation and keep interest rates low.
Inflation is to blame
A high cost of living is mainly caused by inflation. Inflation lowers the purchasing power of money. As inflation increases, the same amount of money will buy fewer goods and services than before. This is because prices rise faster than wages, which means that people have less disposable income to purchase items they need.
Inflation was caused by free money the government gave to people and businesses during Covid. As a result, demand spiked throughout the economy, raising prices. beecause
The cost of money
The cost of money is the amount that must be paid for borrowing funds. It includes mainly interest rates, fees, and other costs associated with the loan. People tend to borrow more when money is cheap (interest rate is low). When money is expensive (interest rates are high), people won’t take on as many obligations, leading to a decrease in economic activity. This can lead to a decrease in production and, consequently, higher prices for goods and services. In addition, when money is expensive it can be difficult for people on low incomes to borrow funds, which can make the cost of living even higher.
Import
Inflation also causes currencies to depreciate in value, making it more expensive to import goods from other countries. As an example, an increase in the value of the US dollar relative to another currency will make imported goods from that currency more expensive in the US. The tomatoes that are imported from Mexico into the US going to become more expensive due to the change in the value of their currency.
How does the Federal Reserve fight inflation?
The government can’t sit on the sidelines. That’s a really painstaking process for us. The Federal Reserve is the United States central bank. The Fed’s primary goal is to keep interest rates low and control inflation. As a means of fighting inflation, the Fed can raise interest rates to reduce demand and slow down the economy.
In addition, they can buy and sell government securities, change bank reserve ratios, and do open market operations. All of these measures are aimed at keeping inflation down and keeping the economy going.
We, the consumers, are directly affected. On a daily basis, this is a lot to pay. Even though they know what they’re doing to the people, they also know that in the long run, it will lower prices.
All the predictions say prices will stay high through 2023 and 2024 since inflation is still way above 2%.
The bottom line is that high inflation and interest rates can make life more expensive for people since goods become more expensive and borrowing money becomes more expensive. In the long run, the FED’s actions will keep the economy stable and protect it from economic shocks. Keep an eye on inflation and interest rates if you’re considering taking out a loan or buying a house because they can really affect your finances
Here’s what you need to know
- Inflation decreases the purchasing power of money, leading to an increase in the cost of living
- The cost of money (e.g. interest rates, fees, and other costs) also affects economic activity
- Currency depreciation can make imports more expensive
- The Federal Reserve works to fight inflation by raising interest rates and doing open market operations
Nikita
