By EEW Magazine Online // Inflation // Economics

A portion of a popular Scripture in Hosea 4:6 says, “My people are destroyed for lack of knowledge.” What you don’t know can hurt you, and if you don’t know about or understand inflation, you should.

That one word, inflation, is the answer to questions like: why are gas prices so high? Why is rent going up? Why is the cost of food soaring? Lord, what is going on?

If you have been scratching your head over such queries, it’s not just you. Almost everyone is wondering the same thing, which is why EEW Magazine Online is here. We got you, boo.

If you want to understand what inflation means and how it impacts you and the economy and don’t have a lot of time, here is your super simple cheat sheet.

Question 1: What is inflation?

Inflation simply means loss of purchasing power over time. Your dollar won’t stretch as far today as it did yesterday. Why? Because inflation is the annual change in price for a basket of goods and services.

Question 2: What causes inflation?

Sometimes, consumer demand or a “hot economy” causes inflation. That means people have lots of extra cash or credit and want to spend it. If consumers buy enough, companies know they can charge more. So, they raise prices to increase profits without the worry of losing customers.

Inflation can also be caused by limited resources. For example, limited oil production can make gas prices soar. Even supply chain issues, which keeps goods in short supply, can push up prices.

Question 3: Why is America experiencing inflation right now?

Easy. Thanks, COVID. Coronavirus has caused factories to shut down and clogged up shipping routes, limiting the supply of goods—like cars and furniture—and pushing prices up. Airfare and hotel room rates have climbed, too. As of February, 62% of all U.S. adults were living paycheck to paycheck, up from 60% a month earlier, according to a new LendingClub report.

When America virtually shutdown due to the pandemic, some consumers spent less which gave them more savings that they were not tapping into and using to buy things at the time. But now that quarantine is over, people are spending more. Exercise equipment and outdoor furniture, for example, is in demand, and increased demand means—you guessed it— raised prices.

Right now, inflation has a lot to do with shortages of goods, too. Baby formula, anyone? Therefore, companies must figure out how to produce and transport what people want to buy in an economy battered by a global pandemic.

Question 4: Will inflation last?

Possibly. Concerning signs that inflation may stick around can be seen in higher rent prices and home prices—the latter locks some would-be buyers out of ownership.

Another sign that inflation is here to stay is when workers negotiate wage increases to cover soaring costs, and companies dealing with higher labor costs in turn pass those costs onto consumers. Demand for increased pay from companies sometimes means increased prices for consumers to cover those costs.

Question 5: Is inflation bad?

Not moderate inflation over time. But rapid price increases, known as “hyperinflation,” which we are seeing right now, is bad. When this happens, middle-class workers’ dollars don’t stretch as far. Businesses are thrown into a tailspin or are even forced to shut down—especially companies that cannot pass those costs on to customers and must absorb them internally.

Inflation is especially difficult for those on a fixed income, students, and retirees. Poor people, however, get the rawest deal of all. They are hit hardest because they don’t have wiggle room to absorb cost increases. Their small budgets get eaten up faster, and they are forced to cut back on food and necessities—unlike the rich, who may cut back on luxuries, like vacations, to manage inflation.

Question 6: Will the economy go into a recession?

The short answer is maybe. Let’s address this in two parts. First, a recession is a period of declining economic performance across an entire economy that lasts for several months. The Federal Reserve, which is the general bank of the United States, monitors risks to the financial system and works to help ensure the system supports a healthy economy for U.S. households, communities, and citizens. Second, when inflation gets too out of hand, the Federal Reserve increases interest rates to try to cool off a hot economy and slow down demand which could then plunge the economy into a recession. And nobody wants to see that happen, though it could occur.

And there you have it, folks. Your quick and dirty cheat sheet.

As our nation endures a difficult time, be prayerful. Be wise. Be responsible. And be mindful of others by helping them in their time of need when you have extra to give.

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