Inflation is economic jargon to refer to an increase in the supply of money (monetary inflation), price of financial assets (asset price inflation), or the price of expenses in everyday life (Consumer Price Inflation or CPI). It has been a common topic since the final year-end CPI figures were publicly released a couple of weeks ago, showing average price increases at a staggering 7% in 2021 - the highest in four decades.
The Consumer Price Index (CPI) is a commonly shilled and standardized measure of inflation which tracks a basket of goods and services considered common for the average US consumer. Plainly put, the CPI is a highly flawed measure of actual inflation which can be manipulated quite easily by replacing certain items in the basket of goods for lower quality items, giving the artificial appearance of lower inflation… a tactic which has been employed many times.
The approach measuring the CPI has changed over time and previous methodologies would have published current inflation at levels above 10%. This means if you didn't receive a raise of more than 10% in 2021, the amount of goods and services you’re able to purchase has decreased significantly.
But why? What is causing such a radical increase in prices? A quick google search will likely cite several reasons:
Government mandated lockdowns slowed and damaged the production and delivery processes in supply chains causing a relatively lower supply of goods and services compared to demand.
People living off of stimulus checks or getting fired during the pandemic resulted in labor shortages causing a relatively lower supply of goods and services compared to demand.
Effects of the pandemic in 2020 dramatically reduced prices in several sectors - like airlines and leisure - and recovery of demand in these sectors will result in dramatic price increases when making year over year comparisons.
There a little bit of truth to each of these explanations, but trying to attribute price rises to a specific aspect of the economy just seems sorta short sighted. When it comes down to it, your high school economics teacher was right; prices are a measure of supply and demand. If there is more demand than supply for any given good, then its price will go up.
Explaining why there is more demand than supply across all goods and services in the US - the largest and most complex economy in the world - is equivalent to explaining why the 330 million people are producing and buying certain goods and services. It is a claim of knowing why humans are making decisions in their daily lives. This line of thinking is why many consider economics to be a social science as the economy is a culmination of each individual’s human action.
If you find deciphering the drivers of inflation to be an impossible task, you may have some empathy for the workers at the Federal Reserve who are mandated with solving the ongoing and ever complex puzzle of understanding and controlling price inflation while also maximizing employment.