6 things a CSU economics professor wants you to know about inflation

The bad news about inflation keeps coming, with prices rising 9.1% in June as compared to the year before, according to the latest Consumer Price Index report.

It defies the expectations of some experts, who had expected that number to drop. Instead, inflation has risen to the highest level since 1981, and the costs of essentials like gas, food and housing have continued to increase.

Stephan Weiler, a professor of economics at Colorado State University, co-director of CSU’s Regional Economic Development Institute and a former Federal Reserve research officer, said that the current situation is unique as compared to past economic events for a variety of reasons.

Here are six things Weiler says we should understand about the economy, and what could happen next. 

Inflation is increasing – and so are the number of new jobs

Stephan Weiler headshot

Stephan Weiler is the co-director of the Regional Economic Development Institute at Colorado State University and a professor of economics. 

Even with gas prices up 60%, groceries up over 12% and rent up 6% over the last year, companies are continuing to hire. Weiler said over 300,000 jobs were added during June alone – and that’s what makes this whole situation “weird.”

“Normally when you’re thinking about an economic downturn or recession, you don’t end up with jobs growing,” Weiler said. “There are two job openings for every person looking for a job – which is mind-boggling.”

Weiler said many retail workers and those in similar industries are more likely to jump jobs despite a looming recession because of the fact they’re so in demand.

“I don’t blame them for wanting to search for a much better job,” he said.

Keep an eye on a ‘wage-price spiral’

A basic way to think about inflation is that it involves too much money chasing too few goods, Weiler said. In this case, consumers with extra money saved during the pandemic are fighting against supply chain issues caused by the war in Ukraine, container ship delays, Chinese business shutdowns and rocketing transportation costs.

All of this is causing prices to rise, but wages aren’t increasing at a similar pace. 

“The average wage increase last year was 5%, but that’s just over half of inflation, so you’re not making as much money as you did before that raise,” Weiler said. “The problem is, the more people have in terms of money, the more money there is to chase goods. Wages increase the inflation rate, which then continues to go up beyond wages, and it becomes a ‘wage price spiral.’ 

“That’s what economists are really concerned about, because when that kicks in, it’s really hard to stop.”

The last time this happened was in the late 1970s and early 1980s, and Weiler said the Federal Reserve had to significantly raise interest rates in order to get the situation under some semblance of control.  

But, that came with a caveat: the difficult 1982 recession. 

The Federal Reserve has the power to change the situation – but it comes with a cost

When it comes to big, sweeping changes, Weiler said there’s little the president or Congress can do about inflation. That power instead rests on the Federal Reserve, which at its last meeting already raised interest rates by 0.75% in an attempt to cool an overheating economy.  

Weiler said in light of the CPI report, he expects the Fed to raise interest rates by at least that amount again, or even up to 1%. This could trigger a recession, but how large of an impact it has remains to be seen.

“They’re trying to deflate the bubble without popping it, and that’s very hard to do,” Weiler said.

One of Weiler’s concerns is “stagflation,” which is a combination of economic stagnation and inflation. The U.S. gross domestic product fell in the first quarter, and if it falls again in the second, the country will meet the economic definition of a recession.

Prices, meanwhile, continue to increase, though Weiler said fuel prices have had a slight decrease this past month.

Inflation isn’t just happening in the U.S. 

The European Union’s inflation rate was at 8.8% in May 2022 – and in Turkey, it’s at a mind boggling 54.8%, according to the Pew Research Center. 

Weiler said right now, inflation is a global problem. 

“We’re all in a pandemic, everyone has savings, and everyone has supply constraints,” Weiler said. “What’s noteworthy is the Euro is now worth roughly the same as the dollar, which is a big benchmark, and one to continue to follow.”

The current economic situation involves multiple variables

Weiler said if just one of the factors contributing to the high rate of inflation were to begin to abate, the entire situation might begin to get significantly better.

“If the Russia crisis calms down, that’s one big factor,” Weiler said. “If some of the supply chain linkages opened up, that’s also a huge amount. There’s already an indication that fuel prices are beginning to drop, and that will help all kinds of things, from trucking to warehousing. The housing market is beginning to soften as mortgage rates climb.

“The best way I can put it is that we’re in an exceptionally unusual combination of circumstances.”

It’s not all doom and gloom

Weiler said there are indications that airline prices are beginning to fall (they’re still up 34% over last year), and hotels are also following suit, though the summer tourism season is much stronger than it was in 2020 and 2021.

Most importantly, Weiler said it all comes back to jobs.

“Interestingly, I think we’re in reasonable shape, and it’s because of the job market,” he said. “Having a job is a key point to feeling good about life, and since unemployment is low, it doesn’t quite feel like a familiar recession.” 

He said Colorado seems to be doing better than the nation as a whole, and that despite what the Fed does, the natural behavior of consumers might play its own part in rectifying this confounding economic situation.

“If that 5% raise turns into what’s essentially a pay cut because of inflation, consumers are going to spend less,” Weiler said. “It will take pressure off the market, since inflation has a way of slowing down people’s overall spending. Think of it this way: If just buying necessities is more expensive, you’re going to pick a camping trip over staying at a hotel. Just that little decision is a tiny part of what will make inflation go down, as demand softens and supply recovers.”