Slow Down…What is Inflation and How is it Affecting my Life???
Inflation, dissected and applied to costs of living in just five minutes
Today, inflation has gained a lot of traction around the globe as an economic discussion topic. One can see that inflation is running across all aspects of life, whether in the news headlines, in the conversations of policymakers, or among friends. However, the question remains, what is inflation and what is its relevance to the economy? In this article, we’ll take a closer look at inflation, its effects on people’s lives, its importance that keeps it as a global concern, and its great power in economic policies.
So, what even is “Inflation?”
Inflation is the overall rise of the prices of goods and services, and it results in a decline of the purchasing power of money. What it implies is that the same amount of money buys less number of goods and services after inflation as compared to before. This phenomenon is usually measured using indices such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), which track the changes in the prices of a basket of goods and services over time. Specifically, we are in a cost of living crisis according to indices, with estimates reporting that 70% of workers are currently seeing real wage growth (their nominal wage minus inflation) which is negative. What this means is that these workers are losing the little discretionary spending they have and will soon be drowning in debt, if they’re not already.
This isn’t just one isolated statistic though. Polls from Pew Research Center and other news organizations agree that every year, childcare costs go up by 13%, one of the biggest costs for an average household. In bigger cities, particularly in California, house mortgage payments cost 60–68% of income. Add all of the other inflated costs in California, and it is almost impossible to stay afloat. This pattern is being repeated
Beyond Headlines: The Ripple Effects of Inflation on Economy, Income, and Policies
The impacts on the economy of inflation could be felt by a number of stakeholders, whose reactions to it are dependent on who they are. The first step is erasing purchasing power. Prices go up and purchasing power decreases. People find that there is less stretch in their money and they end up with lower living standards. The only way to prevent this is to have corresponding income increases, or curbing inflation in the first place so we don’t end up in a repeated inflationary cycle.
Along with the consumer prices the savers and investors are also affected by inflation. Inflation eats up the real value of cash or savings held in low-bearing accounts accumulated over time for the sake of savers. Additionally, investors can also be subject to the decreasing purchasing power of their returns, if the interest rate on their investment is lower than the rate of inflation.
Inflation also challenges businesses. The cost of the input will squeeze the profit margin unless it can pass the cost through to the consumers by way of the increased prices. Thus, this may not be an option in some cases, especially when there is high competition or consumer demand is low.
Persistent Causes and Concerns
The reasons inflation remains a subject of concern are mostly due to a number of factors. A significant factor is the negative effect of high or unstable inflation on the stability of the economy. As a result of hyperinflation, which is also known as the rapid and uncontrollable increase in prices, the economic situation becomes chaotic and the public loses confidence in the currency. The normal monetary policy progression and economic activities are being disrupted as well.
Central banks and monetary policymakers closely watch inflation also for its effects on monetary policy. Controlling inflation is one of the key objectives of central banks and some of them even set target inflation rates in the framework of their monetary policy. In order to maintain price stability, continuous inflationary pressures could call for measures of monetary tightening, such as hiking interest rates, which in turn can affect economic growth and employment. For example, in the US, the Federal Reserve has repeatedly increased rates to about 5 and 5.25%. What this does is it allows for people to save more and spend less, curbing any inflationary cycle.
Global factors like movements in commodity prices, exchange rates, and geopolitical events can also have inflationary effects. The supply chain disruptions, such as those seen during the COVID-19 pandemic, can make inflation even worse through shortages and price hikes.
Strategies for Stability
Although this problem can’t easily be fixed by just implementing a blanket policy and every region will have unique things to incorporate, I think a few basic policies could be considered.
- Firstly, increase energy abundance. I think the US has an immense capacity for nuclear energy, and especially considering fossil fuels cost 33% more for the US citizen now than last year, a nuclear source would provide cheap, quick power, without running out for hundreds or thousands of years. For those who say that it produces toxic waste, I would consider reprocessing, which can repurpose any remaining nuclear waste by splitting it and reducing high-toxicity waste. This would lead to a lot less spending for the average person and for the government as well, even creating new jobs for the economy.
- Secondly, which is the biggest solution in my opinion, is tightening government spending and better managing the budget. Our national debt is about 1.25 times the size of our GDP, which is greater than almost every developed country. This leads to more devaluation of the dollar, and more inflation, which harms the average person as we struggle to keep up with interest on government debts. This harms every taxpayer, who is losing money for this spending. But where does this actually go? Economic stimulus, or artificially increasing the money in supply in the economy, isn’t working either. The government has pumped 41% of money into the money supply, but economic output has only grown 3%. This additional money is not being properly managed. Businesses are being more and more regulated, and money is being centralized. If the government was efficient at allocating money, this would be great — however, I believe that the only way to be 100% efficient is allowing consumers to make the decision for themselves. The US should return back towards a more laissez-faire economy.
These solutions obviously aren’t perfect, or they would already be in place. But I think that they are common sense steps which could be improved for the betterment of everyone who has to deal with inflation.
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