Eli5: Current Inflation



How can inflation be so high right now when average incomes have stagnated for so long? People don’t have more money to spend. Why is inflation so high?

In: Economics

The Fed has printed 25% off all money in the last year. People are flush with cash as savings rates have never been higher. There is no question of whether or not we have increasing inflation, we do. Only question is how long it will last.

Neither one is causative towards the other. In the US, wages aren’t tied to inflation, leading to this exact problem.

The answer, of course, is for Congress to raise the minimum wage. Unfortunately, the vast majority of Congress would rather eat rat poison than do that.

People aren’t the only folks spending money. Companies are spending it, trying to restart operations. Of course, the big player is Government. They are spending money much faster than they are raising it, so that’s the source. Given the problems being faced by their citizens, they clearly feel justified even if they are causing inflation.

Inflation is caused by an increase in aggregate demand. Printing money, or salaries going up can, but don’t necessarily, cause an increase in aggregate demand. If the government wants to control inflation, they just need to decrease aggregate demand, the most effective way being increasing taxes on the wealthy, which effectively takes that money out of the economy.

You can read more about this by googling “modern monetary policy” or mmt for short.

It’s a short term blip, caused by dramatic drops in prices a year ago on many goods due to COVID, and shortages of things like computer chips and lumber now that have led to higher prices on appliances, cars, new construction homes, furniture.

Also, people do have money from stimulus, enhanced unemployment, etc. and there is pent up demand from doing nothing for a year. The money not spent commuting or vacations or going to restaurants is now getting spent.

People might be telling you that printing money has something to do with inflation and it might be true for some things but most things we see increasing are short term impacts caused by the pandemic. Let’s look at some.

Lumber. During the pandemic, many workers were able to continue working from home. They had more time andb were spending it in the home. This, combined with low interest rates led to many home improvement projects. Sawmills could not keep up with demand due to the pandemic and prices for lumber started to rise.

Cars. Used cars have shot up in price. There’s a chip shortage caused by the pandemic and new cars are sitting at manufacturers waiting for sometimes a single part.

Restaurant prices. Can’t even buy wings. Why? Pandemic messed with supply. See a theme?

People do have more money to spend in the USA because of stimulus checks. That’s the whole point of them.

Also, average incomes haven’t stagnated. Average *real* incomes have stagnated. In other words, wages have gone up at basically the same rate as inflation. So, by definition, what wage growth we’ve had is capable of supporting the overall inflation we’ve had over the same time.