What the Hell is Inflation?
Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time.
What Causes Inflation?
Well, a number of things. One of them being expansion of the money supply. An expanded money supply happens when the Federal Reserve prints money at a rate higher than the growth rate of the economy. With more money in circulation, demand grows and prices go up.We’ve seen this recently with the distribution of stimulus checks and rise in unemployment claims due to the effects of the Covid-19 pandemic.
Another cause is attempting to manage national debt. When the national debt skyrockets, the government has two main options. One is to raise taxes to make its debt payments. If it raises corporate taxes, companies will likely shift the burden onto consumers through higher prices. This is an example of cost-push inflation.
The government’s other option would be to print more money. But again, this would result in more inflation. So if the government uses both approaches to tackle the national debt, it may effect and or INCREASE inflation.
Why it’s BAD
Inflation can seriously lower the value of the money you’ve invested and saved for retirement. It can also set off a vicious cycle that sparks a recession. With an overall decline of purchasing power, consumers drastically cut back on spending, even on necessities. As a result, businesses cut back on investing and spending, and they lay off workers. Unemployed workers, in turn, spend less than they used to, causing businesses to let even more people go.
However, before that happens, the Fed may choose to combat inflation by bumping up interest rates. This takes money out of circulation, thereby cooling the economy down before it overheats.
Inflation Today
The 2021–2022 inflation surge is the higher-than-average economic inflation throughout much of the world that began in early 2021. It has been attributed to the 2021 global supply chain crisis caused by the COVID-19 pandemic, and unexpected demands for certain goods.
Experts also say there are three main factors currently fueling much of America’s recent price growth: sharply rising labor costs, energy prices and interest rates. Each one pushes the cost of everyday consumer goods higher, and it will take a complex set of forces to return to pre-pandemic normal.