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Have you ever wondered why inflation happens?

In this video, we'll look into everything you need to know about what might be causing the inflation we're experiencing right now.

First, what is inflation?

Inflation is the decline of purchasing power of a given currency over time.

In other words, take the average price of a basket of selected goods and services in the economy, and estimate the rate at which the purchasing power declines.

You can also look at it as the rise in the general level of prices, often expressed as a percentage.

Let's take a look at a simple example.

Say you go to buy a frozen pizza that used to cost $10, but over time, the cost rose to $12 for the same pizza.

You can calculate the inflation rate by subtracting the starting price from the later price,

and divide it by the starting price, and then multiply the result by 100 to get the inflation rate percentage.

In this example, you can see that the inflation rate percentage is 20%.

Now that we know what inflation is, generally speaking, many wonder why it's happening and how to prevent it from accelerating at the rate it currently is.

There are certainly many events that are causing inflation to rise, such as the war in Ukraine and new and reoccurring lockdowns in places like China due to COVID-19.

However, there are many other things that could be contributing to the recent 40-year high in the United States and acceleration of inflation around the globe.

As inflation will likely get worse before it gets better, let's take a look at a few theories as to why this is happening and potential ways of how to fix it and slow the rate of inflation.

Reason number 1, Pandemic Caused Shortages.

It seems there's a general agreement that the effects of the pandemic are to blame for the recent rate of inflation.

The economy has not been able to function normally due to disruptions in supply and several industries having to slow down or halt production.

When you consider that the supply chain is global, including commodities, global shortages could certainly be attributed to inflation. 

On top of shortages of the goods themselves, some experts say that the vulnerabilities in our infrastructure, such as clogged ports and deficiencies in the trucking industry,

have made it difficult to transport goods around the market.

Reason number 2 is due to the climbing oil prices which translates to climbing gas prices, ultimately causing intense cost pressures that affect a wide range of industries.

Even before the pandemic, energy and gas prices were on the rise, but experts say the situation with Russia is making things worse.

Russia is the third-largest oil producer after the US and Saudi Arabia,

but it is the world's largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia, especially in Europe.

Russia's war on Ukraine and the resulting sanctions are also pushing up prices elsewhere on commodities, such as wheat.

Reason number 3, experts argue, is due to the three stimulus packages that were pumped into the economy.

They believe the issue is that the government put too much money into circulation, which has decreased the power of the dollar and driven prices up.

They say nothing on the scale of trillions was needed.

It's also debated whether it was the rounds of stimulus checks that gave people more money in their bank accounts to spend,

or whether the money handed to corporations accelerating job growth is to blame.

Reason number 4 has some people blaming corporations for consolidation and price setting.

They say that companies are using their power to set prices at whatever they like because of the lack of competition.

They also say that companies are boosting inflation higher by using the problem as an excuse to increase prices so that they can make more profits.

A study found that two-thirds of corporate profits are due to the inflation increases, and at the end of the day, corporations do have the power to change prices and create inflation.

Lastly, some economists are blaming the cycle of rising wages and rising prices as a self perpetuating cycle.

So, now, what's the fix?

Well, there doesn't seem to be an easy, straightforward answer.

On a domestic level, the Federal Reserve has started to raise interest rates.

The idea is that when the Fed raises rates, it makes it more expensive to borrow money, which means less spending and less demand.

However, there's a concern that doing so could push the US economy toward a recession.

Keep in mind things like rent prices, which, with rising interest rates, could make building housing more expensive and raise rent prices, making the inflation problem worse.

Others believe that the government can do more to help with inflation.

The White House and President Joe Biden have taken some measures to try to address inflation,

such as rolling out a supply chain task force to address issues such as infrastructure at ports and shortages in essential products like semiconductors.

As inflation increases, the federal government could look into raising taxes, cutting spending, better antitrust enforcement, taxes on corporate profits, and price controls.

But this would require White House and bipartisan cooperation in Congress. 

Ultimately, these fixes for inflation are just going to take some time.

Did you find this video about causes and fixes of inflation to be helpful?

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