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Confused About Inflation? You’re not alone.

inflation paradoxically, is both incredibly easy to understand and absurdly complex.

Let’s start with the simplest variant: inflation occurs when prices rise in general.

This is important “by and large”: The price of goods will fluctuate at any point in time due to changing tastes. Somebody does a viral TikTok about Brussels sprouts and suddenly everyone has to have it; Boom, sprout prices rise. Meanwhile, the sellers of cauliflower, the trend vegetable of last season, are practically giving away their goods. Such fluctuations are constant.

However, inflation occurs when the average price is practical everything Consumer buying is increasing. Groceries, houses, cars, clothes, toys, etc. To meet these necessities, wages must also rise.

It is not bad. In the United States, for the past 40 years (and especially this century) we have been living in an ideally low and slow level of inflation associated with a well-oiled, consumer-oriented economy with prices rising at around 2% a year, if that is so. Sure, the prices of some things like housing and healthcare are much higher than they used to be, but other things like computers and televisions have become much cheaper – so the average of all things combined is relatively stable.

Still with me

All right, so we come to today and why inflation is in the news.

When “inflation” is a bad word

Inflation becomes problematic when this slow and slow simmer is brought to a boil. Then you hear economists talk about the “overheating” of the economy. The global economy is currently in a rigorous boil for a variety of reasons, largely due to the pandemic.

Use economists two main measures of tracking inflation in the United States, and both are at their highest levels in nearly four decades. the Consumer price index for November rose 6.8%, while the consumer spending index, favored by the Federal Reserve, rose 5.7%.

And here Econ 101 merges a little with Psych 101. Inflation has a behavioral economic aspect that can become a self-fulfilling prophecy. When prices rise over a sufficiently long period of time, consumers begin to anticipate the price increases. You buy more goods today if you think they will cost significantly more tomorrow. This leads to increased demand, which means that prices continue to rise. And so forth. And so forth.

This can be particularly difficult for the Fed, whose main job is to control the money supply and keep inflation in check.

How did we get here?

To blame for the pandemic.

In the spring of 2020 when Covid-19 spread it was like a tug the plug of the world economy. Factories around the world are closing; people stopped eating in restaurants; Airlines grounded flights. Millions of people were laid off when the business disappeared practically overnight. The unemployment rate in America skyrocketed from about 3.5% in February 2020 to nearly 15%.

It was the worst economic slump on record.

At the same time, the Fed has taken emergency measures to prevent the financial markets from refueling. The central bank cut rates to near zero and began pumping tens of billions of dollars into the markets every month by buying up corporate bonds. In doing so, the bank likely prevented a complete financial crisis. But the maintenance of this easy money policy for the past 20 months has also – you guessed it – fueled inflation.

From the early summer of 2020, the demand for consumer goods picked up again. Fast. Congress and President Joe Biden said goodbye historic stimulus package of $ 1.9 trillion in March, which suddenly flooded Americans with cash and unemployment benefits. People started shopping again. Demand rose from zero to 100, but supply could not recover easily.

It turns out that when you unplug the global economy, you can’t just plug it back in and expect them to be buzzing at the same pace as before.

Take cars, for example. The automakers saw the start of the Covid crisis and did what any smart company would – temporarily closed to mitigate losses. But not long after factories shut down by the pandemic, that also drove demand for cars as people worried about exposure on public transport and avoided flying. Car manufacturers (and car buyers) have been whiplashed.

Cars require an immense number of parts from an immense number of different factories around the world that are built by highly skilled workers in other parts of the world. It takes time to bring all of these discreet operations back online, and doing so while keeping employees from getting sick takes even more time.

Economists often describe inflation as too much money chasing too few goods. That’s exactly what happened to cars. And houses. And peloton bikes. And any number of other items that became hot ticket items.

How is the supply chain involved in all of this?

“Bottlenecks in the supply chain” – you see that everywhere, too, right?

Let’s go back to the car example.

We know that high demand + limited supply = prices rise.

But high demand + limited supply + production delays = prices rise even more.

All modern cars rely on a variety of computer chips Function. But these chips are also used in cell phones, appliances, televisions, laptops, and dozens of other items that, as luck would have it, were in high demand at the same time.

This is just one example of the separation in the global supply chain. With new cars being slow to introduce, demand for used cars shot through the roof, driving headline inflation higher. In some cases, car owners have been able to sell their used cars for more than they paid for them a year or two earlier.

What happens next?

Prices and wages are likely to continue to rise through 2022, say officials and economists. But how long and how much depends on myriad variables around the world.

Policy makers and business leaders are working to remove bottlenecks in the supply chain to keep goods moving at their pre-pandemic pace. It is much easier said than done. And there is no telling what kind of shocks – a resurgent variant of Covid, a massive shipping container stuck in an important waterway, a natural disaster – could affect progress.

For its part, the Fed has publicly admitted that inflation is a far more headache than it expected. The bank is running its bond purchase program, a process known as tapering, in the first half of 2022 and plans to hike rates three times during the year.

And when borrowing becomes more expensive, it can mitigate the price hikes and bring the economy back to a comfortable, gentle simmer.

The CNN Wire
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