Why have prices been rising?

Have you noticed that prices of all sorts of items have gone up over the past year? In 2001, the average price of gas in the United States was $1.44. Eggs were 93 cents a dozen, and a ticket to Disneyland cost $41. Today, gas at a 76 Station not far from Lakeside is nearly $6 a gallon, $5.96 to be precise. A dozen eggs at Metropolitan Market is currently $2.49 and, according to the U.S. Bureau of Labor Statistics (BLS), overall food prices have increased over 10% in the last 12 months—that’s the largest increase since 1981. And the most basic one-day pass to Disneyland will cost you $115. (See infographic below for more data.)

You might be wondering what has caused these prices to go up. The answer: inflation. But what is inflation? Here’s an example: Let’s say the price of shoes is $50 in 2021. You want the shoes really badly, so you try to save up money over the next few months. Well, over the next few months, the manufacturing prices go up by $20. You go back to look at the prices of the shoes after you save up. The shoes are $70. What is inflation? Yes. The reason why theshoes got more expensive is that the company that manufactures the shoes is charging more. The company’s costs have gone up and they pass that on to you, the customer. The company will lose money unless they charge more for the shoes. That is the only way they can balance out their profits. 

Today inflation is happening across the globe with supply chain issues and high demand for popular items. According to CNBC.com, some forecasters say that the global inflation rate will rise to 8.8% annually by the end of 2022 from 4.7% in 2021. Though rapid inflation is often harmful, a lack of inflation can also weaken the economy.  

To get a better understanding of what inflation is and how it’s affecting us, we asked economist and Pulitzer Prize-winning author Liaquat Ahamed to answer a few questions over email. Here’s what we learned:

Q: How do you define inflation?

A: Inflation is an across the board rise in the prices of most things, goods and services, that people want to buy. 

Q: What are the main causes of inflation?

A: An imbalance between the amount that individuals and companies desire to spend (demand) and the amount that the economy is able to produce (supply).

Q: Why is inflation in the news currently?

A: Because starting last year this imbalance between demand and supply emerged and prices of most things, which had been fairly stable, started rising and are now going up by almost 10% a year. This bout of inflation has been caused by three things:

1. Too much spending by the government after the pandemic as it misjudged how much it had to spend to support the economy and help the unemployed.

2. The Federal Reserve, which regulates the cost of credit, again miscalculating and making it too easy and cheap to borrow.

3. The war in Ukraine is causing oil and food prices around the world to rise.

Everyone is arguing how much weight to put on each of these three factors. My view is that roughly equal weight on each of these three factors.

Q: What can bring prices down or slow inflation?

A: The Fed[eral Reserve] needs to make credit more expensive; the government needs to cut its spending and/or raise taxes; and we should exert whatever influence we have to get the Saudis and other oil producers to expand their production of oil.

Q: Do you think we are going into a recession?

A: Unfortunately, yes. When the government or the Fed makes a misjudgment about how much to spend or how low to let interest rates fall, when it tries to correct the mistake, it’s hard to do without causing a recession.