Inflation is running at a 40-year high, driven by high prices for food, housing and utilities.
The Federal Reserve is trying to bring it down by aggressively raising interest rates, even if it pushes the economy closer to recession.
However, prices are increasing, naturally It’s hard for most Americans to get by.
The concept of inflation has been around for decades, as prices have always changed over time. Although it is easy to see and measure the price changes, it is another thing to really understand them.
Inflation can affect many things besides prices, such as employment and wages.
So, what is inflation, and what causes it?
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What is inflation?
Inflation is “inflation,” said Josh Bivens, the school’s director of research Economic Policy Institute. For example, things like gas, rent or food can be affected by inflation.
“Rise of goods, however, simply means that all goods and services, together, rise in price at a similar rate,” he explained.
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What causes inflation?
Inflation can be caused by many things. The most common is “macroeconomic excess of spending over the economy’s ability to produce goods and services,” Bivens said.
In this case, more people are using goods or services that are not readily available to meet those needs, so producers start raising prices.
“If everyone in the economy, tomorrow, thought that they are not going to save any money from their pay, and they will just use the last dollar out of the blue, they will all rush to the shops and try to buy things,” said Bivens. of the use of money. So, you see prices go up.”
Another reason for rising prices is the lack of producers. If there aren’t enough workers to produce the good or service that is needed, this will cause prices to rise again, Bivens said.
“Labor is the biggest part of the cost of making anything,” he explained.
There is also a level of “built-in inflation” within the economy, where systems try to keep inflation at a constant percentage.
In the US, The Federal Reserve System’s inflation target is 2%. This means that businesses can increase prices by 2% every year, and the market will remain competitive. Employees can also ask for a 2% salary increase based on this increase, to be able to purchase goods and services.
“The 2% is kind of built-in inflation; that’s what everybody expects to happen,” Bivens said. “So, what everyone can handle without a lot of pushback from other sectors.”
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Is inflation good or bad?
Inflation is good and bad, Bivens said.
“The inflation we have today (in 2022) is bad. It’s too high. It’s too fast,” he said. But consistent and good, but low inflation rates can help, he added.
“Inflation is kind of greasing the wheels of the labor market,” Bivens said. “It’s a way to make some adjustments without reducing nominal wages, and the economy seems to work better anyway.”
If inflation exceeds the target percentage, it can cause instability in the market.
“Whatever your goal is, you don’t want to go too far beyond that. You want people to be able to make plans and have an estimate of how much prices and interest rates are going to go up over the next year,” said Bivens. “That’s why inflation, more than the target, is clearly a bad thing.”
Who is harmed by inflation?
It is difficult to know who is being hurt more by inflation, in the general sense. However, anyone who is spending a lot of money on goods or services can be affected by inflation.
For example, when gas and food prices rise, low- and moderate-income families are hurt as they spend a higher percentage of their income on energy and food, Bivens said.
“Any real inflation is caused and driven by a certain set of goods and services,” he said. “As a result, whoever has the largest share of those, and who is using them, will be the one who will be hurt.”
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Will inflation cause recession?
Inflation and deflation are closely related, Bivens said, but the two economic concepts are not exactly linked.
“A large increase in the unemployment rate will put a lot of pressure on inflation,” he said. “As the economy slows down, the inflation rate goes down.”
A recession is not solved by a negative GDP share or even two for that matter. But, the major slowdown in economic activity is caused by several factors, including unemployment, declining production and sales, and falling wages in addition to a negative GDP reading.
This is according to the National Bureau of Economic Research, which provides the official judgment of when the US recession begins and ends.
So, inflation can bring about recession, but it is not a real result.
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