Inflation Made Easy
The “I” word has been on the lips of everyone this year, and no we aren’t talking about investing!
Inflation has been the big bad buzz word in 2022, and you’ll get a million different answers on who’s to blame. While inflation effects every sector of finance, we’ll be primarily focusing on consumer inflation and the reason everything from the eggs on the grocery shelf to the lumber that builds your home has gone up in price.
Inflation – What is it and What Causes it
Inflation is the purchasing power of money over a given time. Simply put, inflation occurs when your $5 can buy less now than it could a year ago. While inflation occurs naturally over time, this level of inflation isn’t the usual levels we see.
Inflation can be caused by several different economic factors, including:
Demand-Pull Effect
When the demand for a good or service outweighs the supply. For example:– People begin to start eating way more eggs than the chickens can produce.
Cost-Push
When prices for a product increase due to a rise in manufacturing costs. For example: Candy bars become more expensive because the eggs used to make the candy bars went up in price
Built-In
When prices rise, wages rise too in order to maintain living costs. While this is a possible cause for inflation, wages rarely go up with inflation 1:1. The inflation of 2021 may actually mean you’re getting a 2% pay cut.1
Money Supply -
The total amount of money in circulation could lead to the Demand-Pull effect, or too many dollars chasing too few products.
What is causing the major 2021 Inflation Rates?
A “Great Era of Inflation” was bound to come. For starters, the US Government’s response to Covid-19 were economic relief bills that totaled over 13 trillion dollars. The economic stimulus package reached nearly everyone in the country, and helped those who were negatively impacted as well as those who were able to save their money for over 18 months. But during that time, a lot of jobs went unattended, leading to massive supply chain shortages that have finally come home to roost.
So, an extra 13+ trillion dollars floating around the country, combined with a desire to spend and return to the old normal, compounded by supply and labor shortages, and cargo ships stuck on the coast 2 equals a classic cocktail of demand greatly outweighing supply.
Is the Current Inflation Rate Permanent or “Transitory"?
That’s not a clear cut answer, and we don’t know for sure yet. When asked if inflation rates would return to the “acceptable” 2% range, treasury secretary Janet Yellen said:
"Well, I expect that to happen next year. Monthly rates of inflation have already fallen substantially from the very high rates that we saw in the spring and early summer," she said on "State of the Union." "On a 12-month basis, the inflation rate will remain high into next year because of what's already happened. But I expect improvement ... by the middle to end of next year, second half of next year." 3
1, Iacurci, Greg (July 2, 2021) Wages are rising, but inflation may have given workers a 2% pay cut - CNBC
2. Goodman, Jack, and Luxen, Micah (October 16, 2021) Shipping disruption: Why are so many queuing to get to the US? - BBC
3. Duster, Chandelis (October 24, 2021) Inflation to fall to acceptable levels in second half of 2022, Treasury secretary says. - CNN