State Policy Network
What is inflation?

If you love bacon, you’ve probably noticed it’s getting more and more expensive. The price of bacon is up 28 percent over the last 12 months. In fact, this mouthwatering breakfast side is more expensive now than it has been in the last 40 years!

What’s behind this soaring increased cost? While there are many factors that contribute to a food item’s price, inflation is a big reason why bacon is so expensive right now.

You’ve no doubt heard about inflation these past few months. It’s all over the news. Gas is up 50 percent, used cars are up 29 percent, and furniture is up 30 percent. The list goes on. As prices continue to rise, more Americans want to know what’s causing this inflation and how long the current inflationary period will last.

Let’s dive in.

What is inflation?

Inflation is an economic term to describe a situation when prices rise in the economy. It means goods and services are becoming more expensive, and your monthly paycheck won’t buy as much as it previously could. As Vox explains, inflation is when everything becomes more expensive.

What causes inflation?

Economist Milton Friedman argued inflation happens because the money supply grows more rapidly than goods and services produced. Because money is made in Washington, DC, that’s where inflation is made.

He famously noted inflation is a monetary phenomenon: “It’s always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output. Moreover, in the modern era, the important next step is to recognize that today, governments control the quantity of money. So that as a result, inflation in the United States is made in Washington and nowhere else.”

To stop inflation, Friedman argued, you just have to stop letting money grow so rapidly.

How do you measure inflation?

A key measure of inflation is the Bureau of Labor Statistics’ (BLS) Consumer Price Index, which measures how much prices go up over a specified time period. The BLS looks at what an average consumer would pay for common goods and services in one year (think housing, gas, groceries, etc.). They take that number and compare it year-over-year. For the past decade, inflation has risen an average of under two percent for the average American. In September 2021, the inflation rate was 5.4 percent—meaning prices rose 5.4 percent in September 2021 compared to September 2020.

Who does inflation hurt?

We all have to pay for common goods and services such as groceries, gas, utilities, and clothing. When the prices of these things increases, it hurts us financially. It’s especially painful for low and middle-income families because they feel the hardship associated with an increase in prices more than a family with a lot of money.

As one expert noted, “simply put, low-income families’ budgets will stress and strain as they confront the coming rising costs of the essentials they need (food, energy, transport, child care).

Why is the United States experiencing rising inflation in 2021?

Some experts argue the inflation spike is due to the economy reopening. Inflation is growing, they argue, because businesses are having trouble keeping up with demand. But other economists and experts think there’s more to it than that.

At Forbes, finance expert Mike Patton offers three reasons why he thinks the United States is experiencing rapid inflation: increased money supply, a declining value of the dollar, and the supply chain. The increased money supply is a result of the massive amount of government spending since the pandemic. With the CARES Act in 2020 and American Rescue Plan Act in 2021, Washington has pumped trillions of dollars into the economy.

Patton explained: “If you put enough money into the hands of consumers, coupled with the stress of the pandemic, they will spend. This has caused an increase in demand, which has served to push inflation higher.”

Because there’s more money in circulation, each dollar isn’t worth as much as it used to, which raises the cost of goods. And finally, the pandemic significantly disrupted the supply chain. The supply chain is another word for the entire system that produces goods and services for consumers. The coronavirus led to massive shutdowns of the economy, which reduced demands for many products and services. As we returned to normal and lockdowns were lifted, supply chains struggled to meet increased demands. Both labor shortages and a lack of raw materials have caused significant supply chain disruptions that continue today. Low production, with a high demand for goods, is causing the spikes in inflation.

How long will the current inflation period last?

Economists and other experts aren’t sure how long inflation will last. Some experts think higher inflation is here to stay for years, while others hope it’s a transitory period as we emerge from the pandemic.

Additional Reading:

Bacon Prices Have Skyrocketed To Record Levels, And They Might Not Go Down Anytime Soon
CNN Business

Buckle Up: 3 Reasons Why Inflation Is Rising

Inflation Surge To Continue: Here Are 3 Reasons Why

What is inflation
Khan Academy

Milton Friedman – Understanding Inflation

Inflation, explained

Categories: News
Policy Issues: Economy
Organization: State Policy Network