What is Inflation?

Inflation is the word that you hear on the news every day for the past several months. First, it was coming and prices would rise. Then, it was here and prices rose more. We see gas prices higher than they have been in several years and we see it in food prices when go to the grocery store. If you’ve been looking for a house or a new car, you have definitely had sticker shock from the increase in prices due to inflation and a number of other economic factors. 

Economists will tell you that inflation is the rate of increase in prices over a given period of time. Currently, we are experiencing higher inflation that we have had in several decades. Inflation is usually caused by people having surplus cash or borrowing money to purchase goods and services. Businesses then raise the prices to compensate for lack of supplies and also to offset the rising costs of the products they are selling. 

There are three basic types of inflation. One is demand-pull inflation which is when more people want a product than there is of that product to buy. Demand causes the price to go up. Those who are willing to pay more get the product. The second type of inflation is cost-push inflation. This is caused by companies raising their prices due to their costs rising. We see this in the restaurants today. The cost of food for them has gone up and that has led to them increasing prices to offset the rising food costs. We also have rising wages which cause the restaurants to raise their prices to offset the increase in payroll. The third type of inflation is built in. We see this in our cost of living raises. Prices of goods and services go up over time and companies give their employees cost of living raises. We also see this in social security increases due to the cost of living increasing. 

There are a number of factors that can affect the inflation rate. The government’s monetary policy is one. Along with the rate of economic growth, wage growth, oil prices, productivity growth, monetary exchange rate and inflation expectations. You can see some of these factors like oil prices in your daily life while others are less visible to you on a day to day basis. It is the government’s hope and the federal reserve that we will see inflation begin to taper in the next 12 months or so. That will help stabilize prices and prevent a return to what was called stagflation in the 70’s. But stagflation is an article for another day. 

By: Billy Griggers

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