The talk of the town centers on inflation.
The Wall Street Journal reports estimates of over 5 percent in the coming months. For many of us, we see these headlines and we have a general awareness that inflation is bad, but that’s about it. So what are we talking about and what are you to make of this kind of economic news?
Here’s the part a lot of people understand. Inflation means, basically, that money is worth less tomorrow than it’s worth today. It means the things you buy are more expensive, so your standard of living goes down. Economists measure inflation by estimating the prices of a group of goods with some number as the index. It’s called the CPI or Consumer Price Index. But so what?
What’s less common to understand is what to make of these numbers. Inflation hovering around 5 percent isn’t great. The US central bank, or the Federal Reserve, wants inflation to be around 2 percent for several reasons. Economists who dislike inflation, called hawks, argue that the stimulus payments from COVID-19 relief brought too much money into the system, which increases our appetite to buy things and keeps people employed. But it also increases prices. Economists who dislike inflation less, called doves, argue that the stimulus money kept people employed, which is the other main goal of the central bank. They also argue that inflation is “transitory,” meaning it’s just temporary until some issues resolve, issues I’ll mention in a second.
By the way, I say doves “dislike inflation less” because no one really wants inflation. It’s just that doves value jobs at the expense of inflation while hawks value stable prices at the expense of jobs. Like all economics, the question centers around trading value.
What does this mean for you?
The causes of inflation are legion, not just the amount of money sloshing around in the system. The supply chain — the process of how your Amazon order makes its way from China to your door — is really backed up right now. You may have noticed how restaurants are low on ingredients that go into your food. You may have also noticed how restaurants are low on staff. The so-called talent shortage has led to an increase in prices, because employers are raising wages to attract more employees. These are only a few of the causes: Consider that a recent edition of The Economist is called “The shortage economy.”
Expect these issues to remain in our world for a few more months. And expect interest rates to rise as leaders at the Federal Reserve try to pull inflation back down to earth.