Why Inflation is Running So Hot

The US Consumer Price Index (CPI) rose 6.8% in 2021.  That’s the highest inflation rate the country has seen in over 30 years.  While other countries are also struggling with inflation, the US has a uniquely bad case; as of Q3 2021, we had the eighth-highest inflation rate in the world.

What’s included in inflation measures?  The CPI measures a basket of goods consumed by a “regular” American, including food, clothing, healthcare, and transportation.  Compared to the year prior, prices on food rose 8.3%, clothing 5.6%, healthcare 6%, and used cars (a form of transportation) 29.7%.   An average worker needs to make more money to afford the same quality of life as before.  

There are two theories regarding the cause of inflation.  Both are applicable to the current situation.  Cost-push inflation suggests the makers of goods have to pay more to provide the same products.  Given the change in commodity prices and supply chain breakdowns, sellers want to pass on some of their new expenses to consumers.  Demand-pull inflation relates to consumers demanding more products than are available, driving prices of the available stock up.  Lockdowns led to pent-up demand in the US, bringing inflation after. 

Why is Inflation so High?
Source: Expensivity
Adam Hansen