You’ve probably felt the effects of inflation by now at the gas pump, grocery store, and even at local restaurants. Prices everywhere are increasing and it’s due to inflation or the increase in the cost of living. Suddenly, it’s more expensive for us to do the things we do on a normal basis. While it’s frustrating and possibly even scary, knowing what it is and how it happens can help you get a better understanding.
Inflation Defined
Put simply, inflation is a decrease in purchasing power. What your $1 bill could buy before, it can no longer buy because prices increased. Your dollar is suddenly worth less than it was before. For example, you go to the store to buy a gallon of milk. Last month it was $2, but today it’s $2.75. That’s an example of inflation – you have to spend more of your hard-earned money to buy the same item.
Why Inflation Happens – The Factors
Now you’re probably wondering why inflation happens. Why can’t that gallon of milk stay $2.00 or why can’t gas prices stay stable? Here’s why.
1. Higher Demand
Sometimes demand causes prices to increase. When demand exceeds supply businesses have to increase prices to keep up. They need more supplies and possibly labor to keep up with the demand, so they have to increase prices to cover those costs.
2. Cost-Push
Another inflation factor that’s outside a retailer’s control is cost-push. If the cost of materials and labor suddenly increase, it’s impossible for businesses to keep up. They have to charge more to afford the materials and labor they normally purchase to keep up with demand.
3. Global Events
Sometimes global events cause inflation. Take COVID-19, for example. We spent months inside our homes doing much less shopping than before. Warehouses became overloaded with inventory, so they had to stop any new deliveries. Once the pandemic improved and people were getting out and shopping again, store shelves became bare because companies didn’t have the typical deliveries they had before. It turns into this vicious cycle of not enough supply to keep up with demand, causing inflation.
4. Government Support
Sometimes even government support can cause inflation. This is what happened during the pandemic. The government sent out stimulus checks to millions of Americans. This gave Americans much more money to spend, causing the supply and demand issues to worsen. The more money that’s in the economy, the higher prices go. Businesses know that they can charge more for the same item, because people are willing to part with their money.
Inflation is the economy’s way of evening things out again. If we kept going at the crazy rate of spending, we were going at, the economy would have imploded on its own. While rising prices make it hard to survive in some situations, it’s a way of getting things to settle back down so we can afford the daily cost of living again. You likely feel the effects of inflation in many areas of your life, including your business and your home life, but there are ways to make it less stressful for you and your loved ones. The next blog in our series will help you understand how you can survive inflation.