I understand why inflation currently happens. The price of gas goes up, so the cost of transporting goods goes up, so the cost of production goes up, etc etc. I can wrap my head around that. But how did it start? What was the first thing to go up in cost, creating this chain reaction? Could it have been avoided if the initial thing did not rise in cost?
In: Economics
For one, at least some inflation is a policy decision. The government manages the money supply and does so in a way to target modest inflation as deflation is terrible for an economy and modest inflation provides an incentive to spend and invest.
Extremely broadly, inflation comes from one of two sides, demand or supply. “Demand pull inflation” is where people have a greater willingness to spend money on stuff (perhaps due to greater levels of employment or an increase in the money supply). People start bidding up the price on the limited supply of stuff available, pushing up prices. “Supply (or cost) push inflation” is when our ability to make stuff becomes constrained but people still have just as much money.
Both of these factors are, to some degree, at play all the time. For the past few years consider the following (also extremely broad) drivers of inflation. There was a *huge* amount of stimulus governments utilized in the face of Covid. This flooded cash into the economy and, all else equal (which it, of course, was not, but this is eli5) that increases prices. At the same time, due to lockdowns, people’s shifting preferences to goods and then back to services very quickly, supply chain issues, etc., our ability to supply stuff was much more constrained.
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