What Is Inflation?

You’ve probably heard a lot about the word inflation in the news recently. But what exactly is inflation? Inflation, as defined by Merriam Webster, is “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.” If that definition is too wordy for you, just think of inflation as things getting more expensive. 

What’s Going On With Inflation Right Now?

The Bureau of Labor Statistics — a government agency that collects, processes, and analyzes statistical data for the public and government — released its consumer price index report on Jan 12, 2022. The report indicated that the consumer price index had risen 7%. A 7% rise in the consumer price index has not been seen since the early 80s. This means that the price of things all across the board will rise and become more expensive. 

Why Did Inflation Become This Bad?

Inflation fluctuates year-to-year, and sometimes it’s high, and sometimes it’s low. The reason why inflation is on the rise this year is because of supply and demand. During the peak of Covid, people were scared and did not want to spend their money. Now, as Covid restrictions are almost non-existent compared to the start of the pandemic, people are going out and spending all of that money they were too scared to spend earlier. More spending and more general activity in the economy is a good thing, but this high demand causes prices to increase. Naturally, this influx of spending has caused a huge demand for more goods and services. This isn’t the only thing affecting inflation though. Once again, due to Covid, there is a supply chain problem driving up the cost of production. Both of these factors have created a recipe for the highest inflation rate in 40 years. 

How Will Inflation Go Away?

There are many ways for this high rate of inflation to ease. There are many things that the Fed (Federal Reserve) can do to calm this rate of inflation. There are many things that The Fed can do, but they each have their issues and drawbacks. The Fed wants to reduce inflation before it can get out of control and cause even worse problems for the country. The problem with solving this inflation problem is that it will raise interest rates. Raising the interest rate does many things, but the main drawback is that it slows the economy down. Also, if The Fed raises interest rates too quickly, it can cause a recession. So, easing inflation is usually a lose-lose situation. On one hand, inflation goes down and the price of living along with it, but the economy as a whole slows down causing who knows what. While on the other hand, you can live with inflation and not risk spiraling into a recession. 

Takeaways

Inflation causes the general price for things to go up. Currently, inflation is at a 40 year high of 7%. It got this high because of an increase in spending after the pandemic fears eased, and the high demand for goods and services was met with a supply chain issue. How will all of this inflation deflate? There are many things the Fed can do, but they each have their own risks associated with them.