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Burning Questions Surrounding Inflation

Burning Questions Surrounding Inflation
January 25, 2022 |

By Justin Miller

Inflation has been a hot topic recently. However, many consumers have more questions than answers. Wendiam Sawadgo, an Alabama Cooperative Extension System economist, helps answer some burning questions.

What Is Inflation?

Inflation is when there is a decrease in the purchasing value of money. Sawadgo said with inflation, a dollar can purchase less than it did in the past.

“We often think of price increases as inflation, but a price increase can be caused by factors other than inflation,” Sawadgo said. “If the price of a hamburger goes up, it could be due to inflation. However, it could also be due to beef prices increasing because of a drought that led to a decreased cattle supply.”

When measuring inflation, Sawadgo said economists will often examine a particular bundle of goods households may purchase. They will then evaluate the price for that same bundle of goods over different time periods. An example of this is the consumer price index (CPI).

What Is Causing The Current Situation?

Sawadgo said economists have mixed perspectives on what is causing increased prices.

“One factor could be the increased demand for goods following the COVID-19 pandemic, coupled with a reduced supply of those same goods,” Sawadgo said. “This reduced supply has been in part due to supply chain disruptions from COVID-19.”

Multiple areas have experienced price increases, including energy, used vehicles and food. Working together, these areas are contributing to the current situation.

“With the higher energy prices, consumers are likely spending more filling up their vehicles with fuel,” he said. “Increased food prices might also be affecting the average consumer’s budget. For example, beef prices have been noticeably up.”

When Will Prices Start To Decrease?

Because there are so many elements contributing to the problem, it’s tough to know when prices will return to normal. Sawadgo said supply chain issues may worsen because of current labor shortages, but that is assuming labor demand rises.

“A record 4.4 million people — or 3% of the labor market — quit their jobs in September 2021,” he said. “Combining the pandemic risks with how employment has changed during the pandemic, this could restrict the labor supply for the near future. So, in short, prices returning to normal likely depends on the labor supply increasing to meet labor demand.”

In the meantime, there may be some ways for consumers to combat higher prices.

“Because not all products have seen equal price increases, people may be able to shift their consumption to goods that have been more sheltered from price increases,” Sawadgo said.

For more information, contact Sawadgo or another member of the Extension farm and agribusiness management team at aces.edu

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