This Is What Living With Long-Term High Inflation Feels Like
If you are under 45 and live in America or Europe, the odds are this past year has been your first real experience with inflation. Other than a blip in 2008, inflation has barely topped 3% in the last 30 years.
But now inflation is back; up more than 8% last month, and it may get worse before it gets better. Some of the drivers of price increases today, supply chain disruptions and war in Ukraine, will eventually abate. But there are reasons to believe we aren’t going back to 2% inflation anymore. The economy is different and the new baseline for inflation will be 4% or 5%.
Americans used to get along just fine when higher inflation was the norm. But the world is different now; 4% poses new costs and benefits to a new generation.
So what does it mean for living your life or conducting your business if inflation hovers between 4% and 5% instead of the 1.5% to 2.5% we've taken for granted for so long? To paint that picture, we need to assume a reasonable degree of stability. If inflation is higher, but remains in a tight range, it won't cause too much damage. The average inflation rate was 4% or 5% for many years and the economy still grew.
That said, much has changed since the late 1980s when inflation hovered around 4%. That rate is almost twice what people now are used to, and all segments of the economy will have to adapt. Getting a pay raise was less critical when inflation was 1% or 2%. Employers got used to giving smaller increases. The last time inflation was high, unions negotiated annual cost-of-living raises built into the pay of many workers. Now most will need to demand it for themselves. For workers who don't — or can't — negotiate raises that keep pace with inflation, their real compensation will shrink each year as their pay is worth less. Even if you do get a decent raise, those increases generally come just once a year, while inflation happens continuously, eating away at your buying power.