What is inflation, and why has it been so high?

Transcript:

Inflation, the change in price of goods and services over time, is often confused with the cost of things. 

Inflation is not about how much things cost, but rather how prices are changing in a given month or year.  

There’s no single culprit.  Early in the pandemic, there were fewer workers and disruptions in the availability of goods due to snarled shipping routes and shuttered childcare centers, among other factors. 

At the same time, demand for some products soared: pandemic-era stimulus programs left shoppers with extra cash to spend, and everyone wanted to buy the same types of things.

More recently, inflation has been driven mostly by the cost of buying or renting a home. This is due to entirely different reasons, mainly that new homebuilding has been slow and older Americans are not moving out of their homes as frequently.

Inflation has slowed since its peak, but that only means prices aren’t rising as quickly as before. The chance that prices actually fall are very slim, although we have seen price declines in products likes eggs and used cars.

Still, the U.S. has made great progress. Reining in inflation has not led to a recession and widespread job loss.  

Cooling inflation, while keeping unemployment at historically low levels, has been the ideal scenario, or what economists like to call a “soft landing.” 

The Fed has targeted an average inflation rate of 2% and will use the tools necessary to get the economy to that place. It’s less a question of “if” inflation will reach this level, and more a question of “when” and how much economic pain it will take. 

Right now it seems like the answer appears to be “soon” and “not too much.”