You may have noticed that your paycheck doesn’t go as far as it used to. That’s because prices are rising, and the overall rate of price increases is called inflation. It’s typically measured by the Consumer Price Index (CPI), which tracks a basket of goods and services consumed by urban consumers.
Inflation occurs when aggregate demand for goods and services outpaces supply. It can be caused by both “demand-pull” and “cost push” factors. “Demand pull” inflation can occur when the government or central bank creates money to stimulate the economy, reduce interest rates or both, leading to increased spending and higher prices. “Cost push” inflation can occur when firms pass along higher raw materials costs to consumers, which can lead to a more rapid increase in the CPI.
The current post-pandemic period of high inflation is believed to be due to a mix of both demand and supply shocks. Demand shocks include expansionary fiscal and monetary policy in response to the COVID-19 pandemic, which stimulated consumer spending and led to reduced production and shipping capacity. Supply shocks were exacerbated by the global effects of the Russian invasion of Ukraine, which pushed up oil prices and other energy costs.
The impact of inflation is felt differently by different segments of the economy. Those who own physical assets, such as real estate or stocks, benefit from a rise in the price of those assets. On the other hand, those who depend on fixed incomes (such as pensioners and the unemployed) are hurt by rising prices because their purchasing power is diminished.
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