Understanding Inflation and What It Means for You

By Tracy Wright

Back in 1985, gas cost about $1.21 on average per gallon, a car would run about $8000 and you could procure a movie ticket for about $3.55, according to AARP. Now over 30 years later, we know that those costs have dramatically increased. The cause of this is inflation, a steady increase in prices and the reduction of the “purchasing power of your dollars,” said Forbes Advisor.

Inflation impacts not just the price of items but affects the entire economy. But what causes it? To explain this, you have to understand the different types of inflation which are basically the effects of supply and demand in the economy, said Forbes Advisor.

DEMAND-PULL

The first type of inflation is demand-pull inflation. This is when the demand for an item increases but supply remains the same, pulling prices up. When the economy recently started to open up again after the onset of the pandemic and people started driving back to work daily, demand for gasoline pulled up prices to adjust for that. Rising house prices can also affect demand-pull inflation.

COST-PUSH

The second type of inflation is cost-push inflation. This happens when supply decreases but demand remains the same, which then pushes prices up. A recent example of this was the computer chip shortage needed to produce most cars. As the supply for new cars slowed, prices rose. If you think you’ve been seeing less car advertisements and special deals, it’s because many car companies can’t keep up with demand.

Inflation is measured through a variety of sources, including the Consumer Price Index, which measures inflation from the consumer standpoint, the Producer Price Index, and the Bureau of Economic Analysis’ Personal Consumption Expenditures (PCE), which “measures price changes for household goods and services based on GDP data from producers.”

HOW DO WE CONTROL INFLATION?

Many experts agree that a low level of inflation is a signal of a healthy economy. But an unyielding and rapidly increasing level of inflation can be very bad for the economy’s health. It can eventually lead to an economic recession. Remember that money is just ink and paper—it’s the inherent value of money that means something.

“One of the primary jobs of the Federal Reserve is to control inflation to an optimum level to encourage spending and investing instead of saving, thereby encouraging economic growth,” said Business Insider.

Governments control inflation by using measures like increasing interest rates, ordering banks to put more money in reserves so there is less to lend and spend, and reducing the supply of money. Unfortunately, many categories of items have been dramatically increasing in price recently such as food (dairy, eggs, meat, poultry and fish), gas and travel. Much of this has been a result of the economy recovering from the pandemic.

To help combat the effects of inflation on your family’s financial health, visit a trusted financial advisor who can give you sound advice on the best ways to save your money and invest in what is most stable in the current economy.

For the past decade, inflation has averaged under 2 PERCENT A YEAR for the typical American.

However, inflation rose to 5 PERCENT between May 2020 and May 2021 due to the lockdown.THE WASHINGTON POST, JUNE 2021

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