inflation
Concerns over inflation continue to be a hot issue in the economic recovery from the COVID-19 pandemic. But what is inflation? And should we be worried about it?
In economic terms, inflation is the decrease in purchasing power—or value—of money. It’s generally measured as an increase in the price of goods and services.
Inflation is measured by calculating the change in CPI between time periods. For example, the inflation rate for 2017 and 2018 was measured by comparing those years’ CPIs against the 2014 and 2015 CPIs, respectively.
The BLS has measured CPI every year since 1913, so we have accurate inflation dating back to over a century ago. The historical average inflation in the United States is 3.2% per year.
What Causes Inflation?
- Demand-pull inflation occurs when the rise in demand for goods and services is greater than the rise in the supply of those goods and services. - While demand-pull and cost-push have tangible explanations, the final theory—called built-in inflation—is more about expectations than reality.
Why is Inflation Bad?
In hard times, people generally have less money to spend. As a result, they buy less, they demand less, and prices drop. Producers are hurt, too, since their cash flow decreases. Thus, deflation is a sign of economic pain.
People are worried about inflation right now. That’s a larger-than-expected increase, and people are worried that the increasing trend will continue. And if your money is sitting in the bank, it will be losing its buying power. But we aren’t helpless. There are ways to protect against inflation.