You fill up your gas tank, and your weekly budget is shot. You’re getting less at the grocery store but paying more. That dream you had of buying a car feels suddenly out of reach, now that everything is out of your price range.
To keep it simple: Inflation is the loss of purchasing power over time — basically, your dollar gets you less. It costs more to do everything from gassing up your car to buying a gallon of milk.
Have you ever heard a Boomer talk about how, “Back in my day, a movie ticket cost $0.50?” Well, over time, inflation has raised the price of that ticket to about $10.
Cost-push inflation: When the cost of raw materials increases for certain goods, sellers raise prices to maintain a profit.
Demand-pull inflation: When demand skyrockets, suppliers can afford to charge higher prices because consumers are willing to pay.
Built-in inflation: When consumers expect inflation, they may demand higher wages at work, which in turn increases production costs for their services, which creates more inflation.
We typically only hear about inflation in the context of bad news (ie: surging grocery prices), but it’s happening all the time. In the U.S., inflation rises at a rate of about 2% per year. That’s normal and healthy — if wages keep up with it. (They haven’t been, but that’s a whole other story).
When inflation grows slowly, it usually means the cost of essentials remains relatively even. Some things (like rent) might rise, but once-expensive electronics (like laptops and TVs) typically decline, keeping overall inflation in check.
Since World War II, there have been seven periods of time during which inflation rose by more than 5% year over year in the U.S.:
Several factors contribute to the current inflation levels, but they largely boil down to one thing: COVID.
In the two years since the world shut down in March 2020, we’ve crept back toward “normal” (for better and worse) — but we’re still facing all sorts of challenges that stemmed from the ongoing global health crisis . And, as it turns out, lots of our systems simply weren’t built to survive these kinds of dramatic changes.
The global supply chain has been significantly affected. Many businesses closed their doors and laid off employees, while other workers were pushed to continue in unsafe conditions until they burned out. Then, as vaccines became available and we as a society attempted to bounce back, businesses found themselves understaffed and unprepared.
As the world shut down, demand dropped so low that oil companies were literally paying to get rid of barrels of oil instead of selling them for a profit. As the economy opened back up, demand got so high that the lagging supply couldn’t keep up — hence, skyrocketing gas prices.
The COVID pandemic was like stepping on a garden hose and stopping the water flow suddenly. When we let our foot off the hose, demand came rushing back out faster than before.
One way to make sure inflation doesn’t screw over the average person: Increase wages to keep up with rising prices. Unfortunately, that hasn’t happened in the U.S. for decades. Wage growth has been stagnant and purchasing power hasn’t improved for the working class.
Even so, with inflation largely in check, the effects have been fairly manageable — until now. As inflation grows exponentially, workers are effectively losing money. They’re paying more for goods and services, but not earning more for their labor.
To combat the effects of the pandemic, the U.S. government poured a ton of cash into the economy through the CARES Act — passed under former President Donald Trump — and President Biden’s American Rescue Plan.
That influx of cash (much of which went to corporations) helped keep unemployment rates down and stock prices climbing to record levels, but there was a trade-off: It contributed to inflation. Pumping cash into the economy — perhaps more than it could support — may have helped to create more demand while supply remained low, leading to a spike in inflation.
This will make it more expensive to borrow money, which in theory will lower demand and allow supply to catch up, thus decreasing inflation.
Ultimately, politicians and people in power are the only ones who have control over inflation.
There isn’t much the rest of us can actually do, other than attempt to manage our budgets, spending, and income accordingly. Here are some tips on how to do that.
Inflation is demand outpacing supply, which is made worse by supply chain issues caused in by the pandemic. The result: empty shelves, which in turn create a run on goods and services that can exacerbate the conditions of inflation.