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What Is Inflation?

Inflation is the rate at which a currency value decreases, resulting in price increases of common goods and services. Generally, inflation consistently occurs and has significantly affected the American currency system over time. For example, having $20 in the year 1800 would be equivalent to having $456.36 in 2022! 

The opposite of inflation is deflation. Deflation is when the value of a currency rises and brings about a decrease in the price of common goods and services. 

What Is Happening With Inflation in 2022?

So far, in 2022, Americans are experiencing significant inflation spikes in food and energy. If you’ve been to the grocery store recently, you may have noticed an increase in prices on some of your pantry staples. In the month of March, the index for fruits and vegetables increased by 1.5%, and the index for meat, poultry, fish, and eggs increased by 1.0%. So far for the year, the index for meat, poultry, fish, and eggs has risen by 13.7%. These food price increases are even making their way into the restaurant industry. As of March, the index for full-service meals has risen 8%, and the index for limited services meals has gone up 7.2% for the year 2022. This particular trend in the restaurant industry would be an example of cost-push inflation. 

Energy costs have also shot up. The widely discussed and debated gasoline prices have increased by 18.3% this past month and a shocking 48% so far for the year. The index for electricity went up 2.2% in March. Other index increases this month include:

  • Shelter (increase of .5%).
  • Rent (increase of .4%).
  • Lodging away from home (increase of 3.3%).
  • Airline fares (increase of 10.7%).
  • Medical care (increase of .5%).
  • Hospital services (increase of .4%). 

Types of Inflation

There are three main types of inflation, they are: 

  • Demand-pull inflation
  • Cost-push inflation
  • Built-in inflation 

While the circumstances surrounding these types of inflation are different, they all result in the same thing; an increase in prices. 

Demand-pull Inflation

Demand-pull inflation reflects the effort of an economy to keep up with the increase in demand for goods and services brought about by the increase in money supply and credit. Similar to the workings of the concept of supply and demand, demand-pull inflation usually results in an intentional and planned increase in prices.

For example, say that a specific pair of shoes become exceedingly popular during an economic boom, causing customers to purchase shoes faster than the supplier can make them. This demand for the product will ultimately result in a price increase to allow the supplier to keep up with demand and reflect how much consumers are willing to pay.

Cost-Push Inflation

Cost-push inflation results from price increases of goods and services due to a rise in production costs. For example, the increase in oil prices may lead to a rise in energy costs. Oil is a foundation in our energy system; it helps us power homes with electricity, keep them cool with air conditioning in the summer, and warm with heating from the furnace in the winter. If oil becomes harder to come by and increases in cost, goods and services that require oil will also rise in price. 

Built-In Inflation

As the market expands, it is almost natural for inflation to occur in our economy. To maintain a healthy economy, prices and wages are somewhat coordinated. As general prices rise, salaries offered to employees are also meant to increase. For instance, say you spend 25% of your income on housing or rent. Ideally, your wage will increase in accordance with any raises in your general housing costs and other expenses. So, even though you may be paying more money, housing costs should still come out to 25% of your income. 

How Is Inflation Measured?

We measure inflation using a few different indexes; they are: 

  • Consumer Price Index (CPI)
  • Wholesale Price Index (WPI)
  • Producer Price Index (PPI)

These price indexes reflect changes in the price of goods and services at the end of the production stages as well as during the production stages. 

Consumer Price Index (CPI)

The Consumer Price Index, also referred to as the CPI, is the rate of change consumers pay for common goods and services used in day-to-day living. Categories reflected in the CPI are: 

  • Food
  • Shelter
  • Fuels 
  • Transportation 
  • Doctor and dentist services 
  • Prescription drugs and other medical care 

Rates of change for these categories and other everyday living expenses are calculated by the Bureau of Labor Statistics each month. 

Wholesale Price Index (WPI)

The Wholesale Price Index, also referred to as the WPI, reflects the changes in the price of goods and services during the production process. The WPI typically tracks items of goods manufacturers would need to make products to sell to the public. For example, some items included on the American WPI are prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing. If items cost more to produce on the manufacturer’s end, they will have to charge more on the retail end in order to make up for those increased production costs.

Producer Price Index (PPI)

The Producer Price Index, also referred to as the PPI, refers to the approximate change in selling prices over time of goods and services. 

While the PPI is a bit similar to the WPI, the PPI measures change from the perspective of sellers while the WPI measures changes from the buyer’s perspective. 

Pros and Cons of Inflation 

Depending on what role you play in the buying and selling processes, you may experience some advantages or disadvantages when it comes to inflation. Generally, inflation tends to benefit sellers and property owners. For instance, say you purchased a home or piece of property for $75,000 in the year 1980. Now, that same home would be worth about $261,684.47. That is an increase of $186,684.47 over just a little of 40 years! If you tried to sell that property now, chances are you would make a lovely profit. 

On the other end of the spectrum, inflation may end up costing buyers and consumers significantly the longer they wait to make purchases. For example, say you were thinking about buying a house costing $100,000 in 2018 but decided to hold off. That same property that was $100,000 is now worth about $114,438.56. That is an increase of over $14,000 in less than five years! 

Can We Control Inflation?

While companies and sellers control their prices to some extent, inflation plays a powerful role. At the end of the day, companies and sellers do what they do to make a profit. So they have to set their prices in accordance with how much cost and effort is required on their part to make the goods and services consumers are looking for possible. This applies to everything from credit cards to loans for bad credit online. As the population grows, people’s needs change, and culture causes purchasing trends to vary, inflation will continue to affect the American economy significantly. 

References:

What Is Inflation?
United States Inflation Rate
Consumer Price Index – March 2022
Inflation Calculator