Inflation is still an issue for many in the United States, with prices across a variety of products continuing to grow this month.
According to the U.S. Bureau of Labor Statistics’ Consumer Price Index, which tracks the change in consumer prices over time, inflation has driven up general costs by nearly 20% since 2020.
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To make that simpler: something that cost $100 in December 2020 would instead cost about $120 last month.
But how does it all work? Let’s break it down.
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The basics are simple supply and demand: when the amount of a product supplied goes up (the supply quantity), the price goes down. When people are demanding more of that product (the demand quantity), the price goes up.
[CLICK ON THE DIFFERENT PRICE POINTS IN THE GRAPH BELOW FOR MORE INFORMATION]
So whenever there are more people wanting something than there is of that item, prices become more expensive.
And if enough of these things are becoming more expensive? That’s when you get inflation.
However, there are two primary causes for inflation. One is called “cost-push” and the other is dubbed “demand-pull.”
They are as follows:
| Inflation | Basic Meaning | Supply/Demand | Examples |
|---|---|---|---|
| Cost-Push Inflation | Goods/services become more expensive for suppliers, so prices at the store go up | Supply 👇 Prices ☝️ | Natural disasters Government regulations Taxes Unions |
| Demand-Pull Inflation | There are more people wanting to buy goods than there are available, so prices increase | Demand ☝️ Prices ☝️ | Government spending Popular products Growing economy Expected price increases |
Now, who (or what) is to blame depends on the situation.
It could be the government. It could be nature. It could even be you.
If you’re confused, don’t worry: you’re not alone. Read below for some examples.
Cost-Push Inflation
“Cost-Push Inflation” just means that goods and services are growing more expensive because the cost of producing these things is going up.
After all, if the supply goes down, prices will have to increase.
Here are some examples:
- Natural Disasters: If a disaster destroys crops or factories, there will be fewer goods to go around, so prices will likely go up across the board.
- Example: Hurricanes, droughts and frosts can kill orange crops, lowering the supply and driving prices up for these fruits
- Government Regulations: If laws make it more expensive for businesses to operate, prices will have to go up to match.
- Example: The 2005 Clean Air Act prohibited certain materials in medical inhalers due to environmental concerns, which drove up prices
- Taxes: Extra fees imposed by the government will ultimately make the overall price go up for consumers.
- Example: Taxes on tobacco are aimed at lowering demand for unhealthy goods, but they also raise the cost for people who buy those products
- Wage Increases: If unions or the government push businesses to increase wages, prices will have to go up to match.
- Example: Minimum wage laws force restaurants to pay servers more, so the prices of meals go up
- There is debate about the impact of minimum wage increases on inflation, as many economists argue that they only inflate prices for minimum wage goods - not all goods across the board.
Demand-Pull Inflation
In contrast to cost-push, “Demand-Pull Inflation” refers to situations where the demand for a given product or service grows so much that prices across the board go up.
If more people are buying something, then that means the good is becoming more valuable, so prices go up.
Here are some examples:
- Government spending: When the government spends more money than it has, it needs to either borrow or print additional currency. This results in more money being present in the economy, which leads to more people spending money.
- Example: During the COVID-19 pandemic, the federal government spent over $4.5 trillion in response efforts, reducing the value of the dollar
- Popular products: As demand grows for a particular good or service, their price grows with it.
- Example: More people are moving to Florida, so housing is growing increasingly expensive
- Growing economy: All else being equal, a free-market economy grows and shrinks in cycles over time. When it does well, more people have more money, which means there is more spending going on.
- Example: When unemployment is especially low, it means plenty of people have jobs and are making money. The workers then spend their money, meaning that there are more dollars going toward fewer goods
- Expected price increases: When people expect prices to increase for specific goods, they will try to buy those goods while the prices are still low. This growth in demand leads to higher prices on those goods.
- Example: During the initial stages of the COVID-19 pandemic, people thought that toilet paper would become scarce and more expensive. As a result, customers flocked to retailers to buy up the toilet paper while it was still available
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