5 Possible Long-Term Effects of the High Inflation of the Last Year

Over the past year or so, one of the biggest news stories has been inflation. While inflation is a financial matter at its core, it affects just about every aspect of modern life. From unemployment to the cost of living, the recent high inflation has left a significant mark on individuals and businesses.

The good news is that inflation may not be as big a driver in the top stories of 2023. It will be a long time before prices go back to normal (if they ever do), but we are unlikely to see them get much higher in the near future. The bad news is that, just like any other big news stories that had a major impact on socio-economics, there will be long-term effects.

How can we expect inflation to impact the next few years? Here are 5 of the most likely scenarios we’ll have to deal with.

1. Lack of disposable income

The high cost of living has been driven by inflation, but it is not going to suddenly go down. This will continue to have a significant impact on people’s disposable income for the next few years. This is because many essential expenses, such as housing, food, and healthcare, are subject to steady price increases even when the inflation rate is normal.

It is not just consumers who are impacted in this regard. When consumers don’t have disposable income, certain industries are impacted particularly hard. These industries typically rely on consumers having extra money to spend on non-essential items. For example, the retail, hospitality, and entertainment industries have seen a continued decrease in sales as customers cut back on spending to deal with inflation. This has led to reduced profits and even closures for some businesses in these sectors.

Additionally, luxury goods and high-end services have also seen a decline in demand, as customers had no choice but to prioritize their essential expenses over discretionary purchases. Wages are rising, but it may take a while before people have enough disposable income to start spending as normal again.

2. Increasing consumer debt

High inflation and the high cost of living have had a significant impact on many individuals and households, leading to a rise in debt levels. The increase in prices for essential expenses has made it difficult for many people to maintain their standard of living without taking on additional debt. This has led to a growing trend of people taking out loans, using credit cards, and relying on other forms of borrowing to make ends meet.

The high interest rate hikes put in place by the Fed while trying to curb inflation have only compounded this issue, as they have made it more expensive for individuals and households to repay their debts. Higher interest rates mean a higher cost of borrowing, leaving more people struggling to make their monthly payments. This can create a vicious cycle, where the high cost of debt leads to decreased spending and investment. This may even lead to a new cycle of high inflation and rising interest rates.

3. Widening wealth gap

Inflation has contributed to increased inequality and a widening wealth gap by disproportionately affecting low-income households and individuals. These individuals had limited financial resources to begin with, and the recent high inflation made it even more difficult for them to maintain their standard of living.

Additionally, inflation has eroded the value of savings and fixed-income investments, which are often held by low-income individuals and retirees. This has played havoc on their budgets, even if they have been diligent in saving and investing over the years. Many retirees had to go back to work for this reason. Even with inflation returning to a semblance of normal, this remains a struggle.

On the other hand, high-income individuals and those with significant wealth are more likely to have investment portfolios that are better able to weather the effects of inflation, such as stocks and real estate. This can result in an increasing wealth gap, as high-income individuals and those with significant wealth continue to accumulate wealth, while low-income households and individuals struggle to keep pace.

The impact of inflation on inequality and the wealth gap can have long-term effects on the economy and society as a whole. It can contribute to a decline in social mobility and reduce the ability of individuals to improve their financial situation over time. Rising inequality will not simply disappear alongside high inflation.

4. Higher wages

It’s not all bad news, though. Wages in the United States are currently increasing apace with inflation. This has been evident in industries with high levels of unionization and strong bargaining power, such as construction and manufacturing, as well as in industries where intellectual property is highly valued. One reason is that the low unemployment rate has given workers more bargaining power, allowing them to negotiate for higher wages.

This increase in wages will help to support consumer spending and boost economic growth, especially if inflation goes down significantly. People who have already seen high increases will continue to earn enough to cover costs which are no longer as high. While higher wages will not magically fix any of the above issues, they do go some way to mitigating the effects.

Ultimately, the impacts of high inflation will not disappear the moment inflation starts to drop. In fact, we are likely to see many effects of inflation continuing to haunt us in the long term. While the increase in consumer debt and the wealth gap will cause further problems, the increase in wages will make this pill easier to swallow.