How to Make Sense of Inflation

The American Consumer Price Index (CPI) for 2021 rose 6.8%.  That’s the highest rate of inflation the US has seen in 30 years.  The CPI tracks a basket of goods relevant to the average consumer, watching goods such as food, energy, healthcare, and transportation.  Year over year, food costs have risen 8.3%, energy 4.6%, healthcare 6%, and used cars (a form of transit) a whopping 29.7%  Even wage workers who received nominal raises are losing money to higher living costs.  People who leave their money in savings accounts watch its value dwindle over time.

Inflation is caused by 2 things: demand pull and cost push.  Since coming out of lockdown, American consumers have demanded more goods than are available, bidding up their collective cost.  At the same time, producers of goods face higher costs of doing business.  Input costs are rising while supply chain breakdowns make shipping goods across the world more expensive.  

The US has tools at its disposal to curb inflation, but they could push the recovering economy into another recession if implemented too quickly.  In the meantime, people who want to hold onto the value of their money need to invest, not save.

Why is Inflation so High?
Source: Expensivity