Why are prices going up for food, gas, and housing? Why are prices rising and who is it hurting? Why is everything so expensive? What is causing inflation, and when will inflation end?
Use this video on the topic to discuss the financial economic concepts of
- Supply and Demand
- Consumer Price Index
- Federal Reserve Bank
Hand out the worksheet below (see the GET LESSON button near the bottom of the page).
Show students the video and have and have them complete the worksheet. Then have a discussion about inflation, it impact on the economy, businesses, and individuals. Discuss each of the questions mentioned in the video. Review the questions on the worksheet.
7-12, Young adults
What is causing Inflation?
Wherever you look these days, there are headlines about Inflation, and most Americans are worried. It is a difficult task to grasp inflation, even though we keep hearing about it in the news. Even those who have been studying the economy and markets for many years don’t completely understand how inflation works. Its effects on society, from who wins to who loses to whether it’s good news or bad news, are complex.
What is inflation?
Inflation refers to a decrease in purchasing power over time. Basically, it means that your money won’t let you buy as much later as it does today. The annual price change for goods and services is called inflation. One main measurement of inflation in the United States is the Consumer Price Index, or C.P.I. It measures the price of consumers out-of-pocket purchases.
Some consumer price inflation can be considered desirable. This is because it allows companies to adapt to changing economies, where labor and commodities may cost more. But inflation that is too high, like we are having, can cause problems.
What is the cause of high inflation?
High inflation in the short-term can be caused by a hot economy. This is one where people have access to a lot of credit and are willing to spend. Businesses may have to increase prices if consumers are purchasing goods and services quickly enough. Companies may decide to raise prices because they know they can increase profits and keep customers.
However, inflation can rise or fall depending on economic developments. Problems in the supply chain can cause goods to be out of stock, which can lead to higher prices.
The coronavirus, which has caused factories to close down and clogged shipping routes, has also contributed to a decrease in the supply of things like cars and , and have pushed prices higher.
It is also true that consumers who have collectively saved a lot of money through months of lock-down and repeated government stimulus checks are spending strongly, which is contributing to some inflation.
Meanwhile, officials claim they don’t yet see any evidence that rapid inflation has become a permanent feature in the economy’s economic landscape. This is despite prices rising very rapidly.
Now, there are many reasons to believe the price surge will recede. The increase in prices this year is largely due to a shortage of goods, including food, cars, and electronics. These will likely decrease as companies find ways to produce and transport the goods people want to purchase in an economy that has been affected by a pandemic. Many households have also built up savings due to repeated stimulus payments. However, they could eventually exhaust these.
Also, There are worrying signs that inflation might be becoming more persistent, which could mean that it will continue to rise rather than diminishing over time. As home prices have increased, rents have gone up and potential buyers have been locked out of purchasing homes. Although consumers are gradually anticipating higher prices, long-term inflation expectations have not yet risen significantly.
Long-term, high inflation can become entrenched when workers start to expect it and are able to negotiate wage increases to offset rising costs. If companies are facing rising labor costs, they may be able to pass these costs on to consumers, and you end up with a situation in which prices and pay go up.
What does inflation mean for the poor?
This becomes especially difficult for people who are poor. Poorer people can have a hard time coping with high or unpredictable inflation that’s not outmatched by wage increases. This is simply because they have less flexibility. The poor spend more on their necessities, such as food, housing, and gas. An impoverished family might be forced to reduce essentials like food.
Inflation can also be a problem for many businesses. Businesses without pricing power, which means they can’t pass costs on to customers easily, suffer the most because they have to absorb increases in input cost by taking a hit with their profits.
To help fight inflation, the central bank, the federal reserve, typically will raise interest rates. Inflation can cause the Federal Reserve to raise interest rates to try to cool down the economy and slow down demand. The problem is that the central bank could also raise interest rates too much, which could lead to a recession which would make things difficult for everyone.
The hope is that the fed can increase interest rates, to slow the economy, while at the same time not slowing it too much causing a recession, while the rate of inflation returns to a more normal level.