Why Is Inflation So High?

9 March 2023

You may have noticed that the prices of your favorite products have recently increased quite a lot. The reason is the incredibly high rates of inflation impacting economies of countries all around the world. In this article, we will learn what inflation is, why it happens, what consequences it can have for average consumers, and what caused the inflation in 2022.

What is Inflation?

Inflation is an economic term used to describe a rise in the price of goods and services that causes the loss of purchasing power over time. Inflation is an important indicator as it shows how much the economy of a country has changed within a given period of time and whether or not the change in question affected the financial well-being of the country’s population.

Typically, inflation is expressed as a percentage demonstrating the rate of price increase within one year. Generally, inflation is calculated by a government agency that gathers the data about the current price of a certain basket of goods and services.

This basket normally includes food, gas, clothing, medicine, energy, mortgage payments etc., but its contents may vary depending on the volatility of the price of a certain product. The agency collects the information about the prices every month and then divides the average cost of the basket of goods by the cost of the same basket from the previous month.

This year’s statistics show that in October 2022 100$ in the USA could buy the same basket of products as $92.81 in October 2021, indicating that the inflation has increased dramatically since last year.

Major Causes of Inflation

There are several major causes that can affect the rate of inflation.

Inflation: Benefits and Drawbacks

Inflation is not always bad. Low inflation rate (~2%) is actually a very good thing as it encourages people to buy more. There are several benefits to inflation:

However, when inflation is high, just like now, it creates a lot of problems:

Why is Inflation So High Right Now?

The data from all over the world shows that this year’s inflation has reached a new record high for the first time since the 1980s. As you can see from the table, this time it spans across multiple countries all over the world. There are multiple reasons for this.

Conclusion

Even though inflation can have a positive effect on the economy, the current inflation is a very concerning phenomenon because it is caused by multiple factors outside the governments’ control. To stabilize the economy, the central banks can try to raise key rates. This may theoretically cause people and companies to borrow and spend less money, slowly bringing the prices of goods down. But without a solution to the natural resources crisis, the global economy may go into another recession.

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