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The United States Can Withstand Double-Digit Inflation — Quartz

By on March 11, 2022 0

Soaring gasoline prices are raising fears that rapidly rising inflation could derail the economic recovery in the United States. Inflation reached 7.9% on an annual basis in February due to the rise in oil prices, and this does not take into account the full effect of the Russian invasion on Ukraine.

But Americans are well positioned to withstand even higher prices for oil and other goods. Between the pandemic government aid and the economic recovery, they have accumulated additional cash. Meanwhile, the economy as a whole is less dependent on oil, so higher prices won’t do as much damage as in the past.

And in the long run, high prices tend to remedy high prices as consumers cut back on spending.

Here’s what will help the U.S. economy deal with rising inflation:

The US economy can afford higher prices

Omicron has shown that American households have some resilience to climate shocks, said Lauren Melodia, deputy director of macroeconomic analysis at the Roosevelt Institute. Until recently, wages had risen, allowing Americans to save more, especially those on the lower-income end of the spectrum. Savings and consumer spending held steady while layoffs remained low despite omicron’s disruptions.

The United States is more resilient to oil production shocks

The United States produces more oil and is more energy efficient than 15 years ago during the oil shock that was part of the 2008 crisis, said George Pearkes, investment analyst at Bespoke Investment Group.

“In our modern economy, oil is both ubiquitous and increasingly less important,” Pearkes said. “If you compare the differences between the volume of oil that we have consumed as a country and the total economic output adjusted for inflation, it has declined significantly over the past 40 years.”

Having more oil produced in the United States also means that oil producers add more to gross domestic product (GDP) and offset some of the losses caused by reduced household spending.

“There was a time when very high oil price inflation could have pushed us into a recession by reducing household spending,” said Josh Bivens, research director at the Economic Policy Institute. “But our oil extraction business is pretty huge now…and they’re generating a ton of national profits now.”

Wage stagnation means inflation will temper

The US Federal Reserve had feared that rapidly rising wages would translate into self-feeding inflation spiraling out of control. But that scenario seems less likely now that wage growth is stagnating.

This could lead the Fed to raise interest rates less than expected this year, especially if high oil prices have a chilling effect on demand for durable goods like cars. Durable goods weigh heavily on core inflation – the Fed’s preferred method of looking at inflation by suppressing gasoline and food prices.

This means that even if oil prices rise, the Fed is unlikely to tip the US into a recession with too many interest rate hikes.