Utah Inflation: What is causing the spike in prices?

Jul 28, 2021, 6:30 AM
File photo: car production line with unfinished cars in a row

SALT LAKE CITY — An imbalance between supply and demand is perhaps one of the biggest contributors to an inflation increase. Even the smallest of disruptions can cause ripples, or a splash, downstream. 

The Consumer Price Index shows inflation jumped more than 5% over the last year. So, what’s causing the jump? Why are we paying more at the grocery store and the gas pump, and why are there so few cars on the market

The answer: it’s complicated. 

A big contributor to inflation is supply and demand, specifically an imbalance between the two. Demand for consumer goods and services dropped sharply during the pandemic. 

“When the pandemic hit, production in many sectors started being cut back or shut down,” said University of Utah economist Stephen Bannister. “They cut back on their forecast, and therefore their production, and it takes them a long time to ramp back up.” 

However, demand is up considerably now that virus-related restrictions have been lifted. We want to do stuff, buy things, and go places.

“They couldn’t go out and spend on services, not in restaurants and other things. So, they didn’t, and that showed up in lack of demand and layoffs in restaurants and so forth,” Bannister said. 

That leaves suppliers of goods and services in a tough spot with a reduced workforce

“Getting them to come back to work is not costless. It takes some expenditure to do that. One way or another, raising their wages, increasing their benefits somehow,” explains Bannister. 

To cover that added cost, manufacturers and service providers pass it on to consumers with higher prices

Bannister says, “If you introduce some kind of a bottleneck anywhere in that manufacturing supply chain ecosystem, then it affects everything downstream.”

Whether this rapid inflation spike will be temporary or long-term is a hot topic in the world of economics. Bannister is confident the supply side of the equation will eventually catch up to meet the increased demand. 

“It’s transitory. It’s a complex system, but it doesn’t cause me a lot of concern for the long run; which is really where inflation can bite you if it becomes embedded for the long run,” Bannister said.

KSL Newsradio will explore how other experts feel about the length of this period of inflation as our Utah Inflation series continues Thursday. 

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Utah Inflation: What is causing the spike in prices?