Nowadays, it seems like even the smallest items are overpriced. If you own a vehicle, you’ve likely experienced the rising gas prices that you have no way of avoiding. If you’re a meat lover, you’ve probably noticed your favorite foods are becoming more expensive. While these two scenarios may seem unrelated at first sight, there’s something significant that connects them: inflation. Inflation rates have been drastically rising over the course of the past few years and has impacted the way we view our economy.
Just 2 years ago, back in 2020, the US’s annual inflation rate was 0.3%. This year, however, inflation rates touched 9.1% in June.
What does this mean for our economy and us?
How do we measure inflation?
Before getting into the causes and impacts of the high inflation rates we’re facing, it’s important to understand the basics about inflation and what it is in a general sense. Inflation is the broad increase of prices in a certain sector or industry, which results in a declined purchasing power for users. US inflation is measured by CPI (Consumer Price Index), PPI (Producer Price index), and PCE (Personal Consumption Expenditures Price Index), all of which are measures to track how the prices consumers pay and producers receives change over time. CPI measures the monthly change in prices that US consumers pay (or in other words, the change in a consumer’s purchasing power), while PPI measures the monthly change in prices that US producers of good and services receive. The PCE tracks the change in the prices of consumer goods on a monthly basis. Inflation, at its core, indicates how much value your dollars are losing. For instance, one gallon of gas cost around $1.20 in the 1980s, while the average price in 2022 for one gallon of gas is around $3. This means that if you saved $15 from the 1980s, a very realistic possibility, you would be able to buy 6.5 fewer gallons of gas now than 40 years ago.
In general, the most common cause of inflation is demand-pull inflation, where the demand for certain goods or services is so high that it outpaces the supply for them, leading buyers to be willing to pay higher prices. Another cause is cost-push inflation, where an increase of production costs forces businesses to raise the prices of their goods and services, leading to higher consumer prices and inflation rates. In 2022 specifically, there are certain factors that have contributed to the high inflation rates. For instance, the Russia-Ukraine war led to the rise in gas and food prices, as social and economic unrest led to sanctions being imposed on Russia by several major economies. These sanctions resulted in the prices of such commodities skyrocketing. Another factor is the US’s job market. After the COVID pandemic, the job market has been recovering well with increasing job opportunities. However, there has been a historic amount of both job openings and people quitting, putting stress on companies to search for the best employees and pay higher earnings to keep workers from leaving. These extra costs are being accounted for by passing them onto customers. The COVID pandemic also forced the US government to print $5 trillion to aid American citizens and keep the global economy moving. Printing more money devalues the currency leading to rising inflation, a well-known example being the post-WW1 hyperinflation in Germany due to the government printing money to finance its debts.
Obviously, prices are increasing at a significantly higher rate than they have in previous years this decade, something you may not be used to – so, how does an individual go about dealing with it? What’s the best step for consumers to take when their savings are losing value and it’s getting more difficult to purchase goods and services? A major way to deal with rising inflation is increasing your income. Finding a new job that pays more or taking on another part-time job may not be the easiest. However, there are other ways to adapt, one being saving small amounts of money wherever you can or cutting back on unnecessary purchases. Whether it be dining out less frequently, driving less, carpooling, or moving in with family or friends, making changes in your lifestyle can help cut expenses, lightening the financial burden inflation may cause. Another major way to fight inflation is to invest. Researching and investing properly allows you to grow your money and keep up with the rising prices that inflation brings, financially supporting you on the long-term.
Conclusion
Inflation is not a new problem - it’s been present for very many years and it’s something we’ve all had to face on a daily basis. As 2022 continues to progress with its unusually high inflation rates, it’s important we stay aware of where the economy is at and what we can do to adapt to it.
댓글