Learn what you need to know about inflation as a consumer.
Inflation is on the rise and gas prices are hitting record highs. For Americans living paycheck to paycheck, these are challenging times, especially for those who were financially impacted by the pandemic. As inflation hits its highest level since 1982, you are probably seeing the impact on your bank account. Understanding inflation can be difficult, even for economists. Here is a guide to help you understand what inflation is, how it’s measured and how it impacts you.
What is inflation?
Inflation means that your dollar is worth less than it was before. It means that your income won’t go as far as it did before inflation. Inflation is expressed as an annual change in prices for general goods and services. The United States uses two main tools to measure inflation:
Consumer Price Index – measures the cost of things consumers purchase with their money.
Personal Consumption Expenditures index – measures things people consume, including things they may not pay for directly like government benefits, insurance, and healthcare.
The Federal Reserve is America’s central bank. It is responsible for keeping prices from increasing too rapidly. It traditionally targets 2 percent annual increases in the Personal Consumption Expenditures index. That is because not all inflation is bad. A small amount of price inflation helps companies cover the rising costs of labor and commodities and remain profitable.
What leads to inflation?
A “hot economy” could lead to high inflation. A hot economy is one in which people have surplus cash or are accessing credit and want to spend it. If demand is too high, businesses may have to raise prices to because they lack inventory or because they know they can charge more and keep customers.
Inflation can also be caused by factors that have nothing to do with economic conditions like limited oil production, sanctions, supply chain issues, and more.
The recent rise in inflation is partly due to supply chain issues caused by the Coronavirus pandemic and high consumer demand. With months of lockdowns and government stimulus checks, some Americans have built up a savings that they are ready to spend. Despite prices going up for certain items, consumers are continuing to buy, keeping inflation high.
How does inflation affect those who earn less?
When inflation is high or unpredictable and is not matched by wage increases, it can be difficult for people who make less money. Those who live paycheck to paycheck have less budget for discretionary expenses as it is. A wealthy household that is impacted by inflation can cut back on trips or shopping, while a low-income household would need to cut back on essentials.
What can you do when inflation is high?
Many people believe this rise in inflation will fade as supply and demand have been impacted by the pandemic and a shortage of goods. As companies work through these issues, inflation should return to normal. In addition, spending will go down as people use the money they built up during lockdowns.
During this time, it’s important to spend wisely and build a savings. Comparison shopping can help you secure the best price for the goods and services you need to buy. If you need funding, Uprova can help. You can request the funds you need online and, if approved, get funding in your account in as soon as one business day.
Summary
Inflation occurs when the value of a dollar goes down. Inflation can be caused by economic conditions, but other factors like supply chain issues can impact it as well. Inflation isn’t always bad; some inflation is needed to support businesses when demand or operating costs increase. When inflation is high, it’s a good idea to save money when possible and comparison shop to secure the best price. If you need funding during these challenging times, Uprova can help. Request a personal loan at Uprova.com now.