What is Inflation?

Have you recently noticed the price of your daily products going up even though it’s the same store and exactly the same brand? Well, that might be a sign of inflation.

Inflation is the rate at which the value of a currency is decreasing, leading to prices of common goods/services going up. It takes into account a wide variety of products that human needs to sustain a comfortable life, including electricity, healthcare, transportation, entertainment, food, fuel.

FYI - An increase in the price of a single product/service isn't considered inflation. Inflation only occurs with a general increase in prices across the market.

Why does it happen?

If the government decides to increase the supply of money through e.g. printing more bills, giving away money (such as the stimulus check, benefits), it decreases the purchasing power of the currency.

The other reason is a supply shortage for products, especially when businesses lack adequate supply, they’re likely going to increase prices. During COVID-19, a lot of factories being shut down led to limited supply of goods, and therefore caused the price to go up (this type of inflation is usually called Demand-Pull).

Finally, the inflation might be also caused by production costs going up due to labor shortage, economic situation, common market trends which results in so-called Cost-Push inflation.


How is it assessed?

There are two main indexes in the US that determine the inflation:

  • Consumer Price Index (CPI) - focuses on the cost of things consumers typically buy out of pocket
  • Personal Consumption Expenditures Index (PCE) - focuses on the cost of things consumers do not pay for directly, including healthcare, government benefits.

Last November CPI increased by 6.8% and PCE rose by 5.7% compared to the year before, which is the highest pace since 1980s.

Is it bad for me?

There is no single answer to that question - it depends on your personal circumstances. If you’re a worker who takes home his paycheck month-to-month, it depends if your pay increases along with the inflation - if it goes up faster than prices increase, you can find yourself better off in a new financial reality.

For low-income households, however, they may end up spending a significantly bigger chunk of their monthly budget on basic needs, such as food, gas, housing. As a result, they may be forced to cut their expenses on food.

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