What Causes Inflation and How Does it Affect You?

What Causes Inflation and How Does it Affect You?

| June 17, 2021

What Causes Inflation?

Inflation occurs when prices go up and the purchasing power (the value of currency) decreases as time goes on. But why can't a dollar today buy you as much as it did in 1955?

Inflation happens when the price of goods goes up. But what's the cause of price of things to go up? It's all about supply and demand. When people want to buy things but there aren't enough things for them to buy, the price goes up to meet the demand. 

There are two different types of inflation, and each one can impact how prices go up. 

Cost-Push Inflation 

This takes place when the supply of goods is low but the demand for them stays the same. When this happens, the prices are pushed up (usually by some kind of event cutting off the supply). 

Demand-Pull Inflation

This happens when the demand for goods goes up but the supply stays the same. If sellers can’t keep up with the supply, then they can raise their prices. This makes the prices pull up to keep up with the demand.

What’s Going On With Inflation Right Now? 

Because of the pandemic, the Federal Reserve began "printing" virtual money last year. Their goal is to pad the economic and banking markets from taking too big of a hit from the COVID-19 fallout. And now that things are opening up again, that money is starting to move around and stimulate the economy. 

Throw in the housing inventory shortage, the lumber shortage, and the car shortage. That's a whole lot of demand and not enough supply — which is exactly what causes inflation. 

Don’t believe it? It’s hard to argue with the facts: Home prices have gone up by 11.2% since last year, the price of lumber has shot up 130% since April 2020, and the average listing price of used cars jumped to an all-time high of $22,568 (that’s the first time it’s even been over $22K).