Biggest Challenge Facing the US Economy Today

Student’s Name
Instructor’s Name
Course
Date
Money and Banking
The US economy is the largest in the world and plays a central role in the world economy. Therefore, exploring some of the challenges facing the US economy is vital because it illuminates the state of the global economy as well. Below is a discussion of the biggest problem facing the US economy today.
The Problem
In recent months, the US economy seems to have somehow recovered from the COVID-19 pandemic. Yet, the prices of consumer products have been on the rise. Currently, inflation is the biggest problem facing the US economy. According to Doherty and Gomez (p.2), 70% of Americans believe inflation is the most significant economic issue. Many Americans have been affected by the rapid rise in prices in the last several months, so inflation has become a significant cause of concern. The US Bureau of Labor Statistics reveals that prices have increased by 8.5% in the last year. Inflation has not been this high for more than a decade, as shown in figure 1.
Inflation has been an issue in the past, and after decades of price stability, it has come back with high intensity. The issue has emerged due to increased demand for consumer products coupled with supply chain disruptions following the pandemic (Hodge, p.1: US Congress Joint Economic Committee, p.17). As shown in figure 2, the producer price index (PPI) has been at its highest since the early 2000s. The increase in costs to producers has been passed down to consumers. This has caused significant economic suffering in many households in the US, making it the most critical problem in the economy.
Effects on the Economy and Americans
The rising inflation threatens the US economy and people living in the US. The US Congress Joint Economic Committee already reveals that inflation has increased consumer anxiety, and if it persists, it will reduce consumers' purchasing power. Additionally, as the costs to producers increase, Americans have to deal with high prices and shortages of goods. This will negatively affect their quality of life. Further, sustained inflation will contribute to rising inequality. For instance, there is already a rise in the price of housing, as shown in Figure 3. According to the US Congress Joint Economic Committee, the increase in housing prices will affect low-income families more because they spend a significant amount of their income on housing. The more the price of housing, the higher the percentage of their income will be spent on housing, leaving them disproportionately affected by inflation. Overall, inflation will slow down economic growth. Hodge notes that if inflation persists, the US economic growth will reduce significantly because the Federal Reserve will be forced to raise the interest rates further. Other than slowing down economic growth, such measures will also increase unemployment.
Proposed Solution
The Federal Reserve needs to lower inflation and facilitate price stability. Already, the current inflation is above the 2% target set by the Federal Reserve (US Congress Joint Economic Committee). One instrument that the Federal Reserve can utilize to return inflation to the set target is interest rates. According to Taylor (p....