CNN

Inflation, explained: Why prices keep going up and who’s to blame

Nov 13, 2021, 4:23 PM

A person shops in the meat section of a grocery store on Nov. 11 in Los Angeles, California. Photo ...

A person shops in the meat section of a grocery store on Nov. 11 in Los Angeles, California. Photo credit: Mario Tama/Getty Images

 (CNN) — Confused about inflation? You’re not alone.

Inflation is, paradoxically, both incredibly simple to understand and absurdly complicated.

Let’s start with the simplest version: Inflation happens when prices broadly go up.

That “broadly” is important: At any given time, the price of goods will fluctuate based on shifting tastes. Someone makes a viral TikTok about brussels sprouts and suddenly everyone’s gotta have them; sprouts prices go up. Meanwhile sellers of cauliflower, last season’s trendy veg, are practically giving their goods away. Those fluctuations are constant.

Inflation is when the average price of virtually everything consumers buy goes up. Food, houses, cars, clothes, toys, etc. To afford those necessities, wages have to rise too.

It’s not a bad thing. In the United States, for the past 40 years or so (and particularly this century), we’ve been living in an ideal low-and-slow level of inflation that comes with a well-oiled consumer-driven economy, with prices going up around 2% a year, if that. Sure, prices on some things, like housing and health care, are much higher than they used to be, but other things, like computers and TVs, have become much cheaper — the average of all the things combined has been relatively stable.

Still with me?

All right, let’s cut to today, and why inflation is all over the news.

When ‘inflation’ is a bad word

Inflation becomes problematic when that low-and-slow simmer gets fired up to a boil. That’s when you hear economists talk about the economy “overheating.” For a variety of reasons, largely stemming from the pandemic, the global economy finds itself at a rigorous boil right now.

In the United States, prices have climbed 6.2% — the biggest increase since November 1990, and well above the Federal Reserve’s long-term inflation goal of around 2%.

And here’s where Econ 101 merges a bit with Psych 101. There’s a behavioral economics aspect to inflation where it can become a self-fulfilling prophecy. When prices go up for a long enough period of time, consumers start to anticipate the price increases. You’ll buy more goods today if you think they’ll cost appreciably more tomorrow. That has the effect of increasing demand, which causes prices to rise even more. And so on. And so on.

That’s where it can get especially tricky for the Federal Reserve, whose main job is to control money supply and keep inflation in check.

How’d we get here?

Blame the pandemic.

In the spring of 2020, as Covid-19 spread, it was like pulling the plug on the global economy. Factories around the world shut down; people stopped going out to restaurants; airlines grounded flights. Millions of people were laid off as business disappeared practically overnight. The unemployment rate in America shot up to nearly 15% from about 3.5% in February 2020.

It was the sharpest economic contraction on record.

By early summer, however, demand for consumer goods started to pick back up. Rapidly. Congress and President Joe Biden passed a historic $1.9 trillion stimulus bill in March that made Americans suddenly flush with cash and unemployment assistance. People started shopping again. Demand went from zero to 100, but supply couldn’t bounce back so easily.

When you pull the plug on the global economy, you can’t just plug it back in and expect it start humming at the same pace as before.

Take cars, for example. Automakers saw the Covid crisis beginning and did what any smart business would do — shut down temporarily and try to mitigate losses. But not long after the pandemic shut factories down, it also drove up demand for cars as people worried about exposure on public transit and avoided flying. Automakers had whiplash.

Cars require an immense number of parts, from an immense number of different factories around the world, to be built by highly skilled laborers in other parts of the world. Getting all of those discreet operations back online takes time, and doing so while keeping workers from getting sick takes even more time.

Economists often describe inflation as too much money chasing too few goods. That’s exactly what happened with cars. And houses. And Peloton bikes. And any number of other items that became hot ticket items.

How’s the supply chain involved in all this?

“Supply chain bottlenecks” — that’s another one you see all over, right?

Let’s go back to the car example.

We know that high demand + limited supply = prices go up.

But high demand + limited supply + production delays = prices go up even more.

All modern cars rely on a variety of computer chips to function. But those chips are also used in cellphones, appliances, TVs, laptops and dozens of other items that, as bad luck would have it, were all in high demand at the same time.

That’s just one example of the disconnect in the global supply chain. Because new cars have been slow to roll in, used car demand shot through the roof, which drove overall inflation higher. In some cases, car owners were able to sell their used cars for more than what they paid for them a year or two prior.

What happens next?

Prices and wages are likely to keep going up well into 2022, officials and economists say. But for how long and how much depends on countless variables across the globe.

Policymakers’ top priority is to unclog the supply chain bottlenecks to get goods moving at their pre-pandemic pace. That’s a lot easier said than done. And there’s no telling what kind of shocks — a resurgent Covid variant, a massive shipping container getting stuck in a key waterway, a natural disaster — could set back progress.

Economists and investors in the United States expect that the Fed will tighten monetary policy by raising interest rates and dialing back emergency stimulus, thereby slow the pace of inflation. When money becomes more expensive to borrow, that can take the heat off price increases and bring the economy back down to that nice, gentle simmer.

We want to hear from you.

Have a story idea or tip? Send it to the KSL NewsRadio team here.

CNN

Soldiers carry the coffin of Ukrainian poet and serviceman Maksym Kryvtsov who was killed in action...

Stephanie Halasz and Ivana Kottasová, CNN

Zelensky warns ‘millions will be killed’ without US aid to Kyiv, as Ukrainian troop deaths reach at least 31,000

“Millions” could die in Ukraine’s war with Russia if US lawmakers don’t approve President Joe Biden’s $60 billion aid request.

23 hours ago

Kathy Brandel and her husband of 27 years, Ralph Hendry...

Sharif Paget, Chris Boyette and Polo Sandoval, CNN

Family of Americans believed dead after yacht allegedly hijacked in Grenada describe scene of violence

The family of two Americans who may have been killed in an alleged yacht high jacking in Granada hope the couple might be found alive.

24 hours ago

Police tape drapes the crime scene on a trail behind Lake Herrick at the University of Georgia in A...

Ashley R. Williams, Raja Razek, Priscilla Alvarez, Isabel Rosales and Jaide Timm-Garcia, CNN

Questions remain in investigation of death of Augusta University student found on UGA campus

As the investigation continues into the death of an Augusta University student, officials confirmed the immigration status of a suspect.

1 day ago

Kenneth Mitchell, here in 2018, has died....

Megan Thomas, CNN

Kenneth Mitchell, ‘Star Trek’ and ‘Marvel’ actor, dead at 49

A native of Canada, Mitchell acquired more than 50 film and television credits over the course of his acting career. He was diagnosed with ALS in 2019.

2 days ago

Charles E. Escalera, 21...

Michelle Watson and Maria Sole Campinoti, CNN

Kentucky man arrested in connection with death of Campbellsville University student

A man has been arrested in connection with the death of a student at Campbellsville University in Kentucky.

2 days ago

Former President Donald Trump walks on stage during the 2024 NRB International Christian Media Conv...

Fredreka Schouten, CNN

Wisconsin ethics panel recommends criminal prosecution for a Trump fundraising committee

A Wisconsin ethics panel is recommending that prosecutors pursue charges against one of Donald Trump’s fundraising arms.

3 days ago

Sponsored Articles

Mother and cute toddler child in a little fancy wooden cottage, reading a book, drinking tea and en...

Visit Bear Lake

How to find the best winter lodging in Bear Lake, Utah

Winter lodging in Bear Lake can be more limited than in the summer, but with some careful planning you can easily book your next winter trip.

Happy family in winter clothing at the ski resort, winter time, watching at mountains in front of t...

Visit Bear Lake

Ski more for less: Affordable ski resorts near Bear Lake, Utah

Plan your perfect ski getaway in Bear Lake this winter, with pristine slopes, affordable tickets, and breathtaking scenery.

front of the Butch Cassidy museum with a man in a cowboy hat standing in the doorway...

Bear Lake Convention and Visitors Bureau

Looking Back: The History of Bear Lake

The history of Bear Lake is full of fascinating stories. At over 250,000 years old, the lake has seen generations of people visit its shores.

silhouette of a family looking over a lake with a bird in the top corner flying...

Bear Lake Convention and Visitors Bureau

8 Fun Activities To Do in Bear Lake Without Getting in the Water

Bear Lake offers plenty of activities for the whole family to enjoy without having to get in the water. Catch 8 of our favorite activities.

Wellsville Mountains in the spring with a pond in the foreground...

Wasatch Property Management

Advantages of Renting Over Owning a Home

Renting allows you to enjoy luxury amenities and low maintenance without the long-term commitment and responsibilities of owning a home.

Clouds over a red rock vista in Hurricane, Utah...

Wasatch Property Management

Why Southern Utah is a Retirement Paradise

Retirement in southern Utah offers plenty of cultural and recreational opportunities. Find out all that this region has to offer.

Inflation, explained: Why prices keep going up and who’s to blame