You have probably noticed at the grocery store how much everything costs. Luckily, it is not just your local grocery store that is much more pricey. If it makes you feel better, the whole world is currently suffering through inflation.
Did you know that inflation climbed all the way to a 40-year-high? But, what is causing all of this? The article today is going to explain what inflation is, what is causing it, and what can be done to treat it. Shall we begin?
What is Inflation?
Let’s begin by understanding what inflation is. According to the dictionary, inflation in an economic sense is the general increase in prices and fall in the purchasing value of money.
A lot of the time, inflation is measured by the year in order to track goods and services. But, when an economy is facing hard times, then it is a common occurrence for inflation to be measured around every month.
Higher inflation rates mean more expensive things such as food, retail items, and gas.
How to Measure Inflation
Measuring inflation is quite easy. All you need to do is know the value of a market basket in a certain year and the value of a market basket in a base year. You then place it in an equation that looks something like this:
Value of Particular Year/Value of Base Year x 100 = Consumer Price Index.
What Causes Inflation?
In the grand scheme of human history, there have been a variety of reasons as to why inflation is occurring. The most common are the following:
- When people gain more money, they are more likely to spend it over saving it. This then causes more demand over supply.
- Disruptions to the supply chain for any number of reasons.
- Sometimes the economy does not always match up with the expectations. A sudden demand with no supply can throw the economy for the worse.
What’s Causing Inflation Today?
There are several major reasons why inflation is happening. While the economy is slowly leveling out and supply chains are being remade, inflation is still being dealt with.
Covid-19 made its appearance in 2020, causing the entire planet to go through a major change in how we approach things. While quarantine and supply chains were an issue, the pandemic is slowly ending. However, inflation is happening now because of spending from households. When the lockdowns ended, many started to go out again and buy things even though the supply chains were/are facing issues. This of course causes shortages and increased prices.
The Russian Invasion of Ukraine
In February 2022, Russia invaded the neighboring country of Ukraine. While politics are a big part of this crisis, it has caused issues with economies from around the world. The war has caused inflation all over the world and has affected four main areas. They are:
- Financial Markets: Stocks can be unpredictable when conflict occurs.
- Energy: Russia is one of the largest contributors to oil and energy. However, their aggression in Ukraine has caused many countries, particularly Europe to be dependent on their own energy, but it still has led to a global energy crisis.
- Transport: Russia is also one of the top suppliers of fertilizer, titanium, platinum, mining production, and palladium. These kinds of things are used for vehicles, aircraft, and farming. With sanctions being placed, supply chains suffer when they don’t receive these items.
- Food: Both Russia and Ukraine supply up to a quarter of the world’s wheat, a fifth of corn and coarse grains, and 80% of sunflower oil. This has led to massive food issues such as food prices being raised and the possibility of famine in places like Africa.
Will Inflation End Soon?
The short answer is nobody can make an accurate prediction as to when it will end. Things like war and global pandemics can have such a disruption on the economy, it is difficult to know when inflation will lower.
The top economic analysts of the world believe that 2022 was the peak and that 2023 will be the year that it shrinks down. In fact, the United States Federal Reserve believes it will get back to its 2% target around 2025.
Inflation can be a tough obstacle for almost everyone on this planet. While causes for it make sense, it is unfortunate that many are affected by financial burdens due to war and disease.
So what does this mean for you? The best thing you can do in this situation is a few things:
- Create an emergency fund
- Budget yourself
- Be smart with investments
- Keep an eye on the interests rates for any debt you may have
By following these things, you can help cushion yourself a little bit. But for now, we all have to suck it up a bit. Hopefully, soon, we can see a light at the end of the tunnel.