Last Updated on February 28, 2023 by Kel Ashley
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The simple meaning of inflation is the rising prices of the goods we consume including the essentials. Nearly every day, prices of food, clothes, airline tickets and more are moving around, as some brands hike prices and others offer discounts. Inflation is striking everyone, but low-income households are feeling it a bit more than others, especially as wage increases for many workers fail to keep up with inflation. Gas prices are at an all-time high, and higher prices for consumer goods mean less discretionary spending for families with lower incomes, but it also means many families are having to shift their budgets just to cover their necessities. If this is happening to you, don’t worry our free resource will help you.
What’s Caused the Inflation Rising
There are two main reasons why inflation has been increasing:
01. Supply
02. Demand
When the covid pandemic and lockdown hit in 2020, businesses closed or cut hours and people stayed home as a health precaution, workers lost their jobs as well as employer’s their employees. Economic output plunged at a record-shattering 31% annual rate in last year’s April-June quarter.
Why is inflation rising right now?
The main causes of the current inflation in the U.S. is the perseverance of supply disturbances and lacking of food products caused by the pandemic. Also, inflation is directly affected by higher energy prices. Most countries around the world are experiencing this.
Canada’s inflation also slowed to 7.6% in July, but it is still far above the Bank of Canada’s 2% target. Gas prices are lowering but families are still feeling the impact of inflated food prices.
Some countries are in a far worse predicament when it comes to inflation. In Argentina, inflation stands at 64% and is expected to hit 95% by the end of 2022. In Turkey, it’s nearly 80%. Inflation is not only a result of foreseeable economic changes, but also geopolitical events that cause ripple effects, such as the COVID-19 pandemic and the conflict between Russia and Ukraine.
As a result of it, and numerous countries imposing sanctions on gas-exporter Moscow, the world felt the commodity shock when energy prices soared high and reached new records. This explains why energy prices reached record highs in many parts of the world.
How Is Inflation Measured?
Inflation is measured by price indexes. A price index evaluates the difference in the costs of a variety of goods and services over time. There are multiple indexes that contribute to measuring inflation in an economy.
1. Consumer Price Index (CPI)
The CPI is the most popular tool. It’s used by the U.S. Bureau of Labor Statistics to measure the change in the inflation rate in the U.S. economy. The CPI focuses on the average change in the price of a diverse group of goods and services commonly purchased by consumers, known as the market basket of goods and services. Some of these goods and services include food, gasoline, electricity, apparel, transportation, medical care, rent and airline fare. When there are changes in the CPI, the statistics bureau is able to see that there’s a change in the cost of living.
2. Personal Consumption Expenditures Price Index (PCE)
The Federal Reserve, also known as the Fed, largely follows the PCE. It’s similar to the CPI because they both track the change in the price of U.S. consumer expenses. However, the PCE has a narrower focus and looks at consumer behaviour. For example, if consumers switched from buying salmon to trout because the cost of salmon increased, that’s a change in consumer buying behaviour.
While the PCE and CPI track changes in expenses, they are used to measure inflation for various reasons and may reveal different inflation rates.
3. Producer Price Index (PPI)
The PPI measures the change in prices experienced by the seller rather than the buyer or consumer. The PPI evaluates the difference in the selling price of goods and services accepted by domestic producers over time. For instance, a local farmer who produces the food you purchase in grocery stores may be affected by the increase in supply costs to grow the food. And then the farmer may sell the food at a higher price, which will result in you purchasing more expensive food in grocery stores.
Inflation can be challenging and stressful to navigate. However, understanding what causes it and how it’s corrected can be an empowering first step for anyone aiming to take control of their finances. To learn more, check out our free resource, even when money is tight.
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