The recent inflation surge has stung the wallets of many Americans. Inflation is a general increase in the prices of goods and services, usually triggered by rising consumer demand that exceeds the production capacity of companies. This is known as demand-pull inflation.
Inflation hurts the most when it increases the cost of necessities that people have to buy, such as food and energy. For lower-income consumers, this can mean that they have to spend a greater proportion of their incomes on these items and can’t afford to save as much as others. Inflation also hurts businesses because they must pay higher raw materials costs and their workers’ wages may increase faster than their revenue.
However, there is some good news: Inflation can be used to help consumers and businesses save. During periods of low inflation, people can take advantage of bargains and discounts that are often offered to offset the higher prices for the same products.
The global inflation shocks of 2021 and 2022 were caused by a complex mix of factors, including oil price shocks, supply chain disruptions, fiscal and monetary stimulus provided in response to the COVID-19 pandemic, backlogs of work orders for goods and services resulting from lockdown restrictions, and demand-supply mismatches in the reopening contact-intensive service sectors. Model-based retrospective analyses reveal that large forecast errors in inflation were largely driven by energy and commodity price shocks, with smaller contributions from supply chain and backlog shocks. These factors combined with non-linear responses between inflation and short-term inflation expectations to amplify these shocks and convert relative price changes into general inflation.