Inflation, explained: Why prices keep going up and who’s to blame
And here’s where Econ 101 merges a bit with Psych 101. There’s a behavioral economics aspect to inflation, where it can become a self-fulfilling prophecy. When prices go up for a long enough period of time, consumers start to anticipate the price increases. You’ll buy more goods today if you think they’ll cost appreciably more tomorrow. That has the effect of increasing demand, which causes prices to rise even more. And so on. And so on. That’s where it can get especially tricky for the Fed, whose main job is to control money supply and keep inflation in check. How’d we get here?Blame the pandemic. And Russia’s war on Ukraine.In the spring of 2020, as Covid-19 spread, it was like yanking the plug on the global economy. Factories around the world shut down; people stopped eating at restaurants; airlines grounded flights. Millions of people were laid off as business disappeared practically overnight. The unemployment rate in America shot up to nearly 15% from about 3.5% in February 2020. It was the sharpest economic contraction on record. At the same time, the Fed implemented emergency stimulus measures to keep financial markets from tanking. The central bank slashed interest rates to near zero and began pumping tens of billions of dollars every month into the markets by buying up corporate debt. In doing so, the bank likely prevented a full-on financial meltdown. But keeping those easy-money policies in place over the past 20 months has also fueled — you guessed it — inflation. By early summer 2020, demand for consumer goods started to pick back up. Rapidly. Congress and President Joe Biden passed a Cars require an immense number of parts, from an immense number of different factories all around the world, to be built by highly skilled laborers in other parts of the world. Getting all of those discreet operations back online takes time, and doing so while keeping workers from getting sick takes even more time. Economists often describe inflation as too much money chasing too few goods. That’s exactly what happened with cars. And houses. And Peloton bikes. And any number of other goods that became hot ticket items. How’s the supply chain involved in all this?”Supply chain bottlenecks” — that’s another one you see all over, right?Let’s go back to the car example. We know that high demand + limited supply = prices go up. But high demand + limited supply + production delays = prices go up even more. All modern cars rely on There’s no single government or central bank that can fix the inflation resulting from those global disruptions.But central banks are doing what they can. In the United States, the Fed began raising rates in March by a quarter of a percentage point — its first increase since 2018 — and have since raised rates four times this year. There’s no sign that they’ll stop anytime soon. When money becomes more expensive to borrow, that can take the heat off price increases and bring the economy back down to that nice, gentle simmer. Or so the Fed hopes. Its biggest challenge is to deploy interest rate hikes at a pace the economy can tolerate — raising them too much, or too quickly, would risk collapsing demand, which could derail economic growth or even cause a recession.