The rate at which prices change can affect many facets of an economy — influencing people’s purchasing power, affecting economic growth and raising or lowering interest costs on the national debt. Understanding and properly managing inflation is one of the keys to a healthy, sustainable economy.
Inflation is caused by the rising cost of producing or purchasing goods and services, which can be due to either a rise in demand or supply disruptions. The COVID-19 pandemic spurred demand for consumer goods, and shortages of some items pushed prices higher, especially as businesses were forced to slow production in order to keep staff safe. This type of inflation is known as “demand-pull” or “goods-price-inflation”.
Other reasons for high price levels include higher raw materials prices, labor mismatches and supply disruptions exacerbated by geopolitical conflict. A combination of these factors led to the re-emergence of inflation in the US, where prices rose at an average annual rate of 2.7 percent in June 2022, according to the Bureau of Labor Statistics’ latest CPI report. However, core inflation — which excludes food and energy prices, often more volatile due to seasonal or temporary supply conditions – was less than half that figure.
Inflation tends to dip during times of recession and depression, when total demand for goods falls, pulling prices down. But it also seems to have a habit of spiking when the economy is growing very strongly, like right after WWII or in the 1960s.
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