Everything to understand inflation and why its return worries

After decades without inflation, widespread price hikes are raising fears of an overheating economy… and new problems for consumers and producers everywhere.

Can’t understand inflation? You are not the only ones.

Paradoxically, inflation is both a relatively simple and absurdly complex concept.

Let’s start with the easy version: inflation translates into a general rise in prices.

The term “general” is essential: the price of goods constantly fluctuates according to the tastes of consumers. If a TikTok video about Brussels sprouts becomes hugely popular, suddenly everyone will want to get it – boom, the price of Brussels sprouts is going up. And producers of cauliflower, the trendy vegetable of the previous year, have to sell off their stocks. There are such fluctuations all the time.

Inflation, on the other hand, occurs when the average price of almost all simultaneously increases: food, real estate, cars, clothes, toys, etc. In order for consumers to meet these expenses, wages must also increase.

And there is nothing to be sorry about. In the United States, since the 1980s and especially since the year 2000, the situation is ideal, as inflation is stable and low, which is a testament to a well-oiled economy that relies on consumption. Prices are increasing by 2% per year, or even less. True, the cost of real estate and healthcare, for example, are significantly higher than before, but other things, like computers and televisions, are much cheaper – overall the situation is relatively stable.

Do you always follow me ?

All right, let’s move on to today, and why inflation is in the news.

When “inflation” is a dirty word

Inflation becomes problematic when the slow and steady rise suddenly starts to explode. We then hear economists say that the economy is “overheating”. For a variety of reasons, almost all of which are linked to the pandemic, the global economy is in an acute phase of overheating.

Economists monitor inflation in the United States with two major indicators, and both are at a peak not seen in the past 40 years. The consumer price index rose 6.8% in November 2021, and the price index for household consumption expenditure, which the Federal Reserve prefers. [Fed, la banque centrale des États-Unis], increased by 5.7%. [L’inflation a atteint 7 % en 2021, selon l’indice des prix à la consommation publié mercredi 12 janvier.]

At this point, the main economic mechanisms somewhat coincide with the main mechanisms


Allison Morrow

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