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Why Inflation Isn’t Falling Like Gas Prices

Inflation hit the highest yearly increase in four decades, primarily due to the cost of gasoline.

Gas prices contributed to the 9.1% increase in consumer prices in the U.S. in June compared to the same month last year.

For more than 50 days in a row, gas prices have been trending down, providing much-needed relief for drivers’ wallets at the pump.

But don’t start celebrating yet.

Despite the significant contribution that gas prices have made to the current wave of unprecedented inflation, researchers caution that there are still several factors that will prevent overall costs from reducing anytime soon.

Everyone is affected by the rising inflation of today and the rate hikes designed to combat it because of commodity prices. Although commodity markets are challenging to grasp, they are essential as the Federal Reserve decides how much to raise interest rates.

Since food and fuel prices vary significantly from month to month, core inflation does not include these costs.

So, while rising gas prices did not significantly increase core inflation, the subsequent drops will not considerably lower it either.

The Covid epidemic caused major commodities to rise by as much as fourfold, contributing to the inflation boom.

Before the first U.S. Covid case in January 2020, crude oil was trading at $64 per barrel. By June, it was trading at $124.

Corn doubled, and the price of wheat went from $195 to $351

The cost of lumber—used in construction and renovation—rose from $426 to $1,686.

The price of natural gas has increased fourfold since the beginning of 2020 and doubled in the previous year.

All of this has an indirect impact on consumer costs.

Now let’s take a look at a few more things influencing inflation.

The Outlook On Oil Remains Vague

Currently, the average cost of a gallon of gas is down almost a dollar since they peaked in June– but the long-term outlook for oil suggests low inventories will keep prices elevated.

In addition to Russia’s war with Ukraine and the sanctions disrupting its oil exports, the unwillingness, or inability, of members of the Organization of the Petroleum Exporting Countries to increase production limits how much additional oil is being added to global markets.

U.S. producers are hesitant to invest significant sums of money in the extraction and refinement of fossil fuels due to long-term policy objectives pushing renewable energy sources.

Housing Prices Stay High

The cost of housing accounts for a sizable portion of the ordinary family’s budget and a sizable portion of the government’s inflation-calculating basket of goods and services.

The way the Bureau of Labor Statistics determines housing costs makes them an essential component of the Consumer Price Index.

Existing home prices increased by 13.4% from a year earlier to a new record high of $416,000 in June.

The Federal Reserve’s aggressive rate hikes have forced more and more families to put off buying a home as prices increase due to the double whammy of rising prices and high mortgage rates.

Housing costs will probably continue to rise, prolonging high inflation.

Crazy Demand And Worker Shortages

There has been an increase in demand for physical goods since the start of the pandemic. With worker shortages increasing, it has turned supply chains upside down, snarling logistics and triggering substantial price fluctuations. 

The main factor driving inflation is an overwhelming demand for too few available items. Until demand is under control, it will be hard for inflation to come down.

Is There A Light At The End Of The Tunnel?

There are some encouraging signs despite predictions that inflation would probably persist through 2023.

In addition to paying less to commute and run errands, high-flying airfares may return to normal, and grocery customers may experience a decrease in price if producers and distributors don’t have to spend as much on transportation to get their products onto shelves.

You could start seeing some food price competition enter the marketplace as transportation costs begin to decrease.

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