What is inflation? Here is the reason for the high prices and who is to blame

It’s not always a bad thing. In the United States, for the past 40 years or so (and especially this century), we’ve been living in the perfect level of low, slow inflation that comes with a well-oiled consumer-driven economy, with prices rising 2% a year, if that’s the case. Sure, the prices of some things, like housing and health care, are much higher than they used to be, but other things, like computers and televisions, are getting much cheaper — so the average of all things combined has been relatively stable.

Are you still with me?

Well, let’s cut short the day, and why inflation is in the news.

When the term “inflation” is a bad word

Economists use two key gauges to track US inflation, and while both were eased between June and July, they are still near their highest level in four decades.

And here Econ 101 merges a bit with Psych 101. There is a behavioral economic aspect to inflation, which can become a self-fulfilling prophecy. When prices rise for a long enough period, consumers begin to expect higher prices. You will buy more goods today if you think they will cost more tomorrow. This has the effect of increasing demand, which causes prices to rise even more. and so on. and so on.

This is where it can become especially difficult for the Federal Reserve, whose main task is to control the money supply and keep inflation in check.

How did we get here?

Blame the epidemic. Russia’s war on Ukraine.

In the spring of 2020, with the spread of Covid-19, it was like stripping global economy plug. Factory closings all over the world; People stopped eating in restaurants; Airlines suspended flights. Millions of people were laid off as business practically disappeared overnight. The unemployment rate in America has jumped to nearly 15% from about 3.5% in February 2020.

It was the most severe economic downturn ever.

At the same time, the Federal Reserve implemented emergency stimulus measures to prevent financial markets from collapsing. The central bank lowered interest rates to nearly zero and began pumping tens of billions of dollars each month into the markets by buying up corporate debt. By doing so, the bank would likely have prevented a complete financial meltdown. But maintaining these easy money policies for the past 20 months has also – you guessed it – increased inflation.

It turns out that when you pull the plug on the global economy, you can’t just plug it in again and expect it to start at the same pace as before.

Cars require a huge number of parts, from a huge number of different factories around the world, to be built by highly skilled workers in other parts of the world. It takes a long time to bring all these covert operations back online, and to do so while preventing workers from getting sick takes even longer.

Economists often describe inflation as too much money chasing too few goods. This is exactly what happened with cars. and houses. and peloton bikes. and any number of other commodities that become hot commodities.

How is the supply chain involved in all of this?

‘Supply chain bottlenecks’ – that’s another problem you see everywhere, right?

Let’s go back to the car example.

We know that high demand + limited supply = high prices.

But higher demand + limited supply + production delays = higher prices.

This is just one example of a disconnect in the global supply chain. As new cars were slow to come out, demand for used cars soared through the roof, driving up overall inflation. In some cases, car owners have been able to sell their used cars for more than they paid them a year or two ago.

what happened after that?

Prices and wages can start to fall, but are likely to remain high for some time. For how long and how much, depends on innumerable variables around the world.

The Russian invasion of Ukraine dashed hopes that prices would fall dramatically in 2022.

And there’s no telling what kind of new shocks — an emerging Covid variant, a huge shipping container stuck in a stream, or a natural disaster — could impede progress.

No single government or central bank can fix the inflation caused by these global upheavals.

But central banks are doing what they can. In the US, the Fed began raising interest rates in March by a quarter of a percentage point — its first increase since 2018 — and has since raised rates four times this year. There is no indication that they will stop anytime soon.