Inflation
Core Inflation
Core inflation is the rate at which prices are rising in the economy, excluding sharply fluctuating items like food and energy.
https://www.investopedia.com/terms/c/coreinflation.asp
Inflation
In a famous definition, Milton Friedman wrote,
Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.
One definition of inflation is
too much money chasing too few goods.
It is an overall increase in the price of goods and services over time. If things cost more but your income doesn’t increase to match the rise in prices, then your money is worth less than it was before, because it can’t purchase as much as it used to be able to buy. To calculate the rate of inflation, the government looks at a consumer basket of commonly purchased items, known as the Consumer Price Index (CPI), tracking the cost of buying the items in the basket over time.
Inflation is happening around the globe, driving up the costs of goods and services. As a result, those things you want or need to buy—groceries, clothes, vacation—cost more today than they did before. Your dollars don’t go as far anymore, and now you have less purchasing power.
Inflation is a moving target that can be measured annually. The long-term average for inflation is around 2%, which means the dollar is holding its value in comparison to the cost of goods and services. This makes the Federal Reserve happy because the amount consumers are paying aligns with the value of the things they’re purchasing. So, everything is even-steven.
For example, at the end of 2020, the year-over-year inflation rate was 1.4%. As of July 2022, it jumped to a high 9.1%. However, this doesn’t necessarily mean the prices of the things you buy regularly—groceries, gas, etc.—were up by only 9.1%. In fact, the Consumer Price Index revealed that there’s been a 12.2% increase in grocery prices. So that gallon of milk, carton of eggs or pack of soft drinks likely costs 12 cents more per dollar.
What causes inflation?
Economists theorize a variety of causes of inflation.
- Strong consumer demand, spurred by rising wages.
- Too much available money in an economy, expectations of rising prices becoming a self-fulfilling prophecy, and sudden shocks to an economic system.
https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp
Examples
- An example of the last would be the COVID-19 pandemic, which caused soaring worldwide inflation in 2021 and 2022.
https://www.investopedia.com/terms/c/consumerpriceindex.asp
How will consumers feel the heat?
Household debt payments, as a proportion of income, remain relatively low. So even as borrowing rates steadily rise, many households might not feel a much heavier debt burden immediately. Interest rates are not top of mind for most consumers during inflation. They might get more worried about groceries and what’s going on at the gas pump. Rates can be something tricky for consumers to wrap their minds around.
How will inflation effect jobs?
Some economists argue that widespread layoffs will be necessary to slow rising prices. One argument is that a tight labor market is fueling wage growth and higher inflation. In August 2023, the economy gained 315,000 jobs. There are roughly two job openings advertised for every unemployed worker.
Job openings continue to exceed job hires, indicating employers are still struggling to fill vacancies.
As a result, some argue higher unemployment might cool wage pressures and tame inflation. Unemployment might have to go as high as 7.5% to reduce inflation to Fed’s targets like 2% inflation.
How can inflation cause recessions?
Inflation will cause increased interest rates. See Inflation and Interest rates
Short-term rates will make a recession likelier by increasing the cost of mortgages, car loans, and business loans. While the Fed hopes that higher borrowing costs will slow growth by cooling the hot job market and capping wage growth, the risk is that the Fed could weaken the economy, causing a recession that would produce significant job losses.
How the Great Inflation of the 1970s Happened
TODO
https://www.investopedia.com/articles/economics/09/1970s-great-inflation.asp
TODO
- How to control inflation rates? https://www.investopedia.com/terms/i/inflation.asp
- Is Lifestyle Inflation Creeping Up on You? Here Are 8 Ways to Avoid It https://www.investopedia.com/ways-to-avoid-lifestyle-inflation-11745891
- Beating Inflation in Retirement: Smart Investment Moves To Make Now https://www.investopedia.com/beating-inflation-in-retirement-11742701
- Your Social Security Benefits Might Not Go As Far Thanks to Inflation https://www.investopedia.com/your-social-security-benefits-might-not-go-as-far-thanks-to-inflation-11741196
- How Inflation Impacts Savings https://www.investopedia.com/articles/investing/090715/how-inflation-affects-your-cash-savings.asp
- What Is the Relationship Between Inflation and Interest Rates? https://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp
- What Causes Inflation and Price Increases? https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp
- 10 Common Effects of Inflation https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp
- Why Donald Trump’s Promise to ‘Defeat Inflation’ Is Harder Than It Sounds - https://www.wsj.com/video/series/news-explainers/why-donald-trumps-promise-to-defeat-inflation-is-harder-than-it-sounds/FEC38536-5D40-42E2-B18A-76BE7A07B0C9?module=ssw&format=essay&topic=econ&topic2=retire
- The problem isn’t inflation. It’s prices. https://www.vox.com/money/2023/11/8/23951098/economy-inflation-prices-job-market-sticker-shock
- Inflation Dictionary: Your Guide to the Jargon - https://www.thebalancemoney.com/inflation-dictionary-your-guide-to-the-jargon-5206432
- Inflation-Busting Strategies for Your Emergency Fund: https://www.investopedia.com/3-inflation-busting-strategies-for-your-emergency-fund-right-now-116948780