A Tale of Two Americas: Inflation in 2008 Compared to 2021
Updated: Jan 5, 2022
As we all know, Federal Reserve chairman Jerome Powell said on Tuesday that inflation may keep rising as we head into 2022. Growing fears over this rise in the annual inflation rate are justifiable, as this number was at 4.4% in September 2021 and now is at 6.2% after October 2021. As a result, many investors and businessmen are nervous that we might be approaching a recession in the near future. We will attempt to look at various indicators and data from 2008, right before the Great Recession, to compare and contrast to the present day.
First, how can we even define a recessionary period? Recessions generally arise from weakness in demand; however, issues with supply can also trigger economic dismay. Recessions come from a period of time where economic activity has become severely reduced, which can be statistically identified by falls in GDP in two consecutive quarters. Real GDP has increased by 6.7% in Q2 and 2.1% in Q3, indicating no worries of a recession at this moment (Bureau of Economic Analysis). However, there are some signs that we may be approaching this economic collapse very soon.
We should look to aggregate supply and demand to attempt to diagnose the future of the American economy. As we have seen in 2021, the economy has had no problem reacting to increases in aggregate demand: Congress just passed their $1.2 billion Bipartisan Infrastructure Deal, and consumers have more than enough money as a result of increased salaries, stimulus checks, and unemployment insurance. However, supply chain problems have sprung up as a result of almost too much demand, and companies have had a hard time keeping up. Nearly 40% of small businesses have supply chain delays as a result of the pandemic, and there has been a 14% increase in supply chain disruptions between 2019 and 2020 (Zippia). Clearly, there are issues with the aggregate supply that could worsen in the near future, with rising inflation allowing for a negative output gap between the availability of supply-side producers to deliver for demand-side consumers.
Other macroeconomic indicators also paint a portrait of a short-term correction. Recessions since the 1980s have been preceeded by 10-point drops in consumer confidence indices. The Conference Board measured a 25.3 point decrease in consumer confidence in 2021, which when compared to that figure shortly before the 2008 financial crisis, is nearly 6% higher.
When we compare the inflationary rates of 2021 against that of the pre-financial crisis of 2008, there are very close similarities. Annual inflation rates in 2008 reached a high of 5.6%, which dwarfs in comparison to the increasing numbers of the present year.
However, the socioeconomic environment surrounding the present is way different than that of 2008. As opposed to the disinflationary depressions of 99 and 08, we are seeing a rise in inflated assets and an overall bubble as a result of untouched interest rates by the fed over the last 10 years. Powell and the fed are planning on hiking interest rates at some point in the next year or so, which could have dangerous effects on the economy if not carried out correctly. If the federal government acts too fast in reacting to this rapid inflation, we could see how America could fall into an inflationary recession with a hyper-devalued currency.
It may be easy to look to 2008 and compare to 2021 and beyond and say they have similar inflationary rates, therefore we will fall to a similar result of 2008. We very well could fall into a recession within the following years; nonetheless, the way in which it happens may result in longer-term effects due to its distinct differences from the 2008 crisis. In 2008, rapid increases in housing prices led to the subprime mortgage crisis, which combined with the failure of the major banks, resulted in a plummeting stock market and financial onslaught for many families. However, we have to be careful about identifying the recessionary aspects of the economy and looking at how inflation is treated by the federal government before making such bold claims about how America will react to the depression.