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The United States economy has undergone significant fluctuations over the last several decades, marked by periods of growth, recession, and economic transformation. Central to these changes is inflation, the general rise in the price levels of goods and services over time. The impacts of inflation can be wide-ranging, affecting individuals, businesses, and governments alike. However, the effects on different generational groups are not always evenly distributed. United 1GPS explores the current state of inflation in the U.S., examining its root causes and its specific effects on Millennials (those born between 1981 and 1996) and Generation Z (those born from 1997 onwards).
The current status of America’s economy
The U.S. economy experienced a sharp downturn at the onset of the COVID-19 pandemic in 2020, leading to high unemployment, decreased consumer spending, and significant government intervention. In response, the Federal Reserve implemented several monetary policy measures, including slashing interest rates to near zero and purchasing large quantities of government securities to stabilize markets. Congress also passed multiple stimulus packages aimed at sustaining consumer demand. While these actions successfully averted a deeper recession, they contributed to a rapid increase in inflation.
By 2021 and 2022, inflation surged to levels not seen since the 1980s under President Ronald Reagan. In June 2022, inflation hit 9.1%, largely due to pandemic-related supply chain disruptions, labor shortages, and the ongoing effects of geopolitical tensions, including the war in Ukraine, which affected global energy markets. The Consumer Price Index (CPI), a key measure of inflation, began rising faster than wages, eroding purchasing power for American consumers. Though inflation has cooled somewhat, its long-term implications remain significant.
How did we get here?
Supply Chain Disruptions: The global supply chain was severely impacted by the pandemic, causing shortages of key goods and materials. These shortages led to increased prices for items such as automobiles, electronics, and household goods.
Labor Market Pressures: A tight labor market, partly due to the "Great Resignation," saw businesses facing challenges in finding workers. As a result, wages rose in many industries. While higher wages can be positive for workers, they also contributed to inflationary pressures as businesses raised prices to cover increased labor costs.
Energy Prices: Oil and gas prices surged following Russia’s invasion of Ukraine in 2022. Energy is a fundamental input cost for most industries, and when these prices rise, the effects ripple across the entire economy, increasing transportation and production costs.
Expansionary Fiscal and Monetary Policies: The unprecedented fiscal stimulus packages and the Federal Reserve's easy money policies provided much-needed support during the pandemic (2020), but these measures also added to inflationary pressures by boosting demand in a supply-constrained economy.
Housing Affordability
One of the most significant impacts of inflation on Millennials and Generation Z has been in the housing market. Home prices have risen dramatically in the past decade, driven by a combination of low interest rates, limited housing supply, and increased demand. As inflation raises construction and labor costs, it becomes more expensive to build new homes, further exacerbating the supply-demand imbalance.
Millennials, many of whom are now in their peak homebuying years, have faced difficulty entering the housing market. Despite being the largest cohort of homebuyers, they are frequently priced out in high-demand markets. For Generation Z, who are just beginning to enter the workforce or housing market, rising prices coupled with student loan debt and stagnant wage growth make homeownership seem increasingly unattainable.
In a higher inflation environment, mortgage interest rates are also on the rise. The Federal Reserve’s efforts to combat inflation by raising interest rates have made borrowing more expensive, discouraging home purchases and increasing the cost of carrying debt. This further complicates the financial outlook for younger generations.
Employment and Wage Growth
Inflation impacts the labor market in both positive and negative ways. For Millennials, who bore the brunt of the 2008 financial crisis, the post-pandemic recovery has offered opportunities for career advancement and wage growth, especially in industries experiencing labor shortages. However, inflation has outpaced wage gains for many, meaning that even with higher salaries, the purchasing power of younger generations has diminished.
For Generation Z, entering the job market during a period of high inflation poses challenges in securing stable, well-paying jobs. While certain sectors such as technology, healthcare, and finance are expected to continue growing, many young workers will face higher costs for essentials like housing, transportation, and education.
Cost of Living and Consumer Debt
Millennials and Gen Z are disproportionately affected by rising costs of living due to their generally lower earning power relative to older generations. Rent, groceries, transportation, and utilities have all increased in price due to inflation, stretching the budgets of younger Americans, many of whom are still paying off student loans or credit card debt.
Rising interest rates make it more difficult for Millennials and Gen Z to manage existing debt or take on new loans. Credit card interest rates have increased, and personal loans are more expensive. Younger generations may also need help with long-term financial goals, such as saving for retirement or starting a business, as inflation erodes the value of their savings.
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Generational Wealth Gap
The generational wealth gap is another critical area where inflation impacts Millennials and Generation Z. Compared to Baby Boomers and Gen X, younger generations have accumulated less wealth by the same stages of life. This disparity is largely driven by high levels of student debt, stagnant wage growth, and challenges in the housing market. Inflation exacerbates this gap, as it decreases the value of savings and investments, making it harder for younger people to build wealth over time.
The wealth gap also has broader societal implications. As Millennials and Gen Z struggle to accumulate assets, they may delay key life milestones such as marriage, homeownership, and starting families, which could have long-term economic and demographic consequences.
The current inflationary environment in the United States presents both opportunities and challenges for Millennials and Generation Z. While some may benefit from wage growth in certain industries, inflation has generally outpaced these gains, leading to a reduced standard of living for many young Americans. Rising housing costs, student debt burdens, and an increasing cost of living are creating economic headwinds for Millennials and Gen Z that could have long-lasting effects on their financial security.
In the long term, these economic pressures may reshape the financial decisions of younger generations, making it more difficult for them to achieve the same level of wealth and stability that older generations have enjoyed. Policymakers must consider targeted interventions to address the unique challenges faced by Millennials and Generation Z, particularly in areas like housing, debt relief, and wage growth, to ensure that inflation does not create lasting disparities across generations.