Grab a piece of paper. Crumple the paper the best you can into a tight ball.
Now, flatten that same ball of paper. Take your time, and do your best to remove every wrinkle.
It doesn't matter how hard you try; those wrinkles will always be there. They won't go away.
The tight ball of crumpled paper represents the high inflation we experienced just following Covid, and the flat piece of wrinkled paper represents the reality of high inflation years later. Just as the wrinkles remain, so do the higher prices.
Yes, inflation rates have returned to levels associated with a strong economy, but the pain of previously high inflation rates remains.
Grocery prices are still high; they're just not rising much anymore.
Wage increases have been outpacing inflation for nearly a year and a half (1), but more wage growth and low inflation are needed to catch up entirely.
We experienced a once-in-a-lifetime pandemic that spurred a global inflation crisis. Just because our economy is booming right now doesn't mean you are wrong to continue to feel the economic pain of the pandemic.
We are all a flat but crumpled piece of paper right now.
The purpose of this post is to provide unbiased and well-sourced fact-based information about higher prices so you can have well-informed conversations with your family and plan accordingly.
Table of Contents
The Definition of Inflation
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices.
Imagine going to the grocery today and filling your grocery cart with 20 items that cost you $100. Fast forward to one year from today, and you put the exact same items in your cart, but your grocery bill is $103. Relative to this example, you experienced 3% inflation.
But there are two parts to this story. Imagine that your paycheck today is $1,000 a week. Fast-forward to exactly one year from today and your paycheck is now $1,030 a week. Relative to this example, you experienced 3% wage inflation.
Healthy inflation allows for wages and prices to increase in parallel.
Hyperinflation
Hyperinflation refers to rapid and unrestrained price increases and inflation in an economy over time, typically at rates exceeding 50% each month.
Disinflation
Disinflation refers to a slowing in the rate of inflation, typically when it eases over the short term. We have been experiencing disinflation for at least a couple of years.
Deflation
Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. A deflationary spiral was ultimately the crushing blow to the economy in the Great Depression of 1929.
Learn More: Inflation, Disinflation and Deflation: What Do They All Mean? via the Federal Reserve Bank of St. Louis
The Basics
If you prefer video illustrations to written explanations and are looking for the basics explained in an entertaining way, watch Why Are Prices Going Up? below, recorded by Two Cents of PBS (2).
The Data
In our past post, "How to Take Politics Out of Personal Finance: Compare Feelings and Facts to Make Informed Financial Choices," we shared embedded and active key data directly from the Federal Reserve on the state of personal finances in America.
Jump straight to the most essential data from that post relative to inflation:
Some lose sight of the fact that over the past 15 years, we have been benefactors of anomalously low interest rates from the housing collapse of 2008. Rates might be higher now than in recent times, but historically speaking, rates are low.
Here is a look at interest rates since the 1950s.
Live Data Embedded from the Federal Reserve: Interest Rates
The Cost of Inputs
The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.
In plain English, it’s the cost producers must purchase to make our goods and services. Embedded below is a live interactive of the Producer Price Index. When those prices rise, the prices of the goods and services we buy will likely increase.
Live Data Embedded from the Federal Reserve: Producer Prices
That said, since May 2022, the cost of what producers use to provide goods and services has dropped, yet the cost of what consumers pay for goods and services has continued to rise, albeit at a much slower rate.
Live Data Embedded from the Federal Reserve: Consumer Prices and Producer Prices
Corporate Profits
As you can see from the previous graph, producer prices have fallen recently, yet the prices consumers pay for those goods and services have continued to rise modestly. Here is why consumers continue to pay more for goods and services despite the decline in the price of what producers are paying.
Corporate profits accounted for about 53% of inflation (3) during the second and third quarters of 2023. Profits drove just 11% of price growth in the 40 years prior to the pandemic, according to the report.
However, as it pertains to grocery prices, economists are less confident that there is empirical evidence that price gouging is causing high grocery prices.
Comparing Inflation Rates Across the World
Last year, the United States had the lowest inflation rate of all the G7 economies in the third quarter.
As Mike Raymer pointed out in our podcast recording, the most recent report (5) places the United States at second. Although we are not currently number one in the world, we are getting to the point where it is best not to be because inflation rates below 2% are not healthy.
Not All Inflation is Created Equal
The American Enterprise Institute (6) created the inflation chart below.
The Federal Reserve
The Federal Reserve (Fed) was established in 1913 by the Federal Reserve Act, signed into law by President Woodrow Wilson. The Fed is considered independent because its decisions don't require approval from the president or other government officials. The dual mandate of the Federal Reserve is low unemployment and stable prices.
The Fed is the primary guardrail for inflation in our market economy.
Suggesting that one political party or the other is single handedly creating higher prices, or that one political party or the other has failed to control prices, is dead wrong.
Learn More: The Fed Explained - Who We Are (7)
Market Forces
Supply and Demand
The principles of supply and demand largely determine inflation in a market economy. Simply put, producers (supply) are incentivized to increase prices to increase profits, and buyers (demand) are incentivized to purchase products at the lowest possible price. The point where those two competing priorities intersect is the equilibrium price, what we pay for our goods and services.
Video Explanation
The easiest way to understand the law of supply and demand is to watch the following video created by Jacob Clifford.
Jacob Clifford is an AP® micro and macroeconomics educator, and holds a Masters degree in Economic Education from the University of Delaware. Jacob is an AP® exam reader and leads College Board workshops and summer institutes throughout the west coast. To understand basic economic concepts, Jacob's videos (ACDC Econ) are the most watched videos nationally because of the quality of his explanations.
Demand Pull and Cost Push Inflation
Whenever the demand for goods and services increases, prices rise if the supply does not keep pace, leading to demand-pull inflation. If raw materials, labor, or other inputs rise in price, suppliers can pass these costs on to consumers through higher prices, a phenomenon known as cost-push inflation. Here is another excellent tutorial on the topics:
The Price of Eggs: An Example
The bird flu is striking again. And as in the past, egg prices are spiking because the supply of eggs is reduced. According to reporting from NPR (8), prices have risen 28.1% in the past year, and the average price for a dozen large, grade A eggs was $3.20 in August.
The last time bird flu struck US farms, in early 2022, egg prices more than doubled during the year, reaching a peak of $4.82 for a dozen in January 2023. Egg prices also soared in 2014 and 2015 when egg prices also briefly soared.
Egg prices are just one example of whacky and unexpected problems that create inflationary and deflationary spikes. Sometimes we have no control over these problems, sometimes we do.
Government Spending
Government spending can play a crucial role in influencing inflation. When the government increases its spending, it injects more money into the economy, often leading to increased demand for goods and services. Conversely, if the government reduces its spending, it can slow the economy and reduce inflationary pressures, assuming other factors remain constant.
Additional fiscal policy actions can influence inflation. Tariffs increase inflation as the tax is passed onto consumers through higher prices. So does immigration policy, which restricts the ability of open jobs to be filled that would otherwise not be. Tax cuts and government spending can also increase inflation, creating more demand for goods and services and driving up prices.
The Recent Role of Government Spending in Adding to Inflation
Federal Reserve Chair Chair Jerome H. Powell recently addressed the primary causes of inflation. What follows is a summary of his "look under the hood" of the inflationary complexities created by Covid.
"This narrative attributes much of the increase in inflation to an extraordinary collision between overheated and temporarily distorted demand and constrained supply. While researchers differ in their approaches and, to some extent, in their conclusions, a consensus seems to be emerging, which I see as attributing most of the rise in inflation to this collision."
The National Bureau of Economic Research (NBER) is a private, nonprofit organization that facilitates cutting-edge research on and analysis of major economic issues. It is nonpartisan and refrains from making policy recommendations, focusing instead on providing background studies and data that underlie decision-making in both the public and private sectors.
NBER summarized the working paper (9), What Caused the US Pandemic-Era Inflation? coauthored by Olivier J. Blanchard and former Fed Chair Ben Bernanke as follows:
"The researchers find that energy prices, food prices, and price spikes due to shortages were the dominant drivers of inflation in its early stages, although the second-round effects of these factors, directly through their effects on other prices or indirectly through higher inflation expectations and wage bargaining, were limited."
Where to Get Unbiased Facts
The pick-your-politics news media and social media often feel like a cesspool of biased information. I have seen countless pieces of nonsense centered around inflation. It's essential to understand whether or not you are collecting unbiased information.
What follows is where you can turn for information you can trust:
Ad Fontes Media: Interactive Media Bias Charts
"Ad Fontes Media is the home of the Media Bias Chart®. We rate the news and news-like sources for bias and reliability."
Click here to access the interactive graphs below.
AllSides Technologies
"AllSides Technologies Inc. strengthens our democratic society with balanced news, media bias ratings, diverse perspectives, and real conversation. We expose people to information and ideas from all sides of the political spectrum so they can better understand the world — and each other."
Click here to access AllSides.
"We are a nonpartisan, nonprofit “consumer advocate” for voters that aims to reduce the level of deception and confusion in U.S. politics. We monitor the factual accuracy of what is said by major U.S. political players in the form of TV ads, debates, speeches, interviews and news releases. Our goal is to apply the best practices of both journalism and scholarship, and to increase public knowledge and understanding."
Click here to access Factcheck.org.
Ground News
"Ground News is a platform that makes it easy to compare news sources, read between the lines of media bias and break free from algorithms."
Click here to access Ground News.
Media Bias Fact Check
“We are the most comprehensive media bias resource on the internet. There are currently 8500+ media sources, journalists, and politicians listed in our database and growing every day.”
Click here to access Media Bias Fact Check.
USA Facts
"You’ve got questions. We’ve got answers straight from the source."
Click here to learn more about USA Facts and receive regular updates.
Straight from the Source
Consider subscribing to newsletters and alerts directly from the source. Below is a list of the primary economic reporting agencies of the United States government and Federal Reserve.
How You Can Manage Inflation
Managing inflation is difficult. The following past posts can help you manage higher prices.
Modern Husbands Podcast Episode
The embedded episode below is available in this post, but will not be pushed out to podcast providers until October 22nd.
The Modern Husbands Podcast: Winning ideas from experts to manage money and the home as a team. 2023 Plutus Award Finalist: Best Couples or Family Content
🔔 Click here to listen and subscribe to the Modern Husbands Podcast on Apple.
🔔 Click here to listen and subscribe to the Modern Husbands Podcast on Spotify.
"The great news is that Inflation is back to 2-3%, but the prices for some of what we buy remain high. In today’s episode, entitled Why Prices are Higher: Just the Facts!, we address why.
Our guests are Dr. Jennifer Davidson and Mike Raymer.
Dr. Davidson is the President of the Nebraska Council on Economic Education and the Associate Professor of Practice in Economics at the University of Nebraska-Lincoln.
Mike Raymer is the Executive Director of the Georgia Council on Economic Education and a former award winning economics educator.
You will finish the podcast understanding how to spot the nonsense shared on social media and some news outlets so you and your partner can have an informed fact based conversation about inflation, and how you can manage it in your home."
Show Notes
00:00 Introduction
02:40 What is inflation and how is it measured?
06:23 Who is primarily responsible for managing inflation in the United States?
14:04 If inflation is down, why are groceries still expensive?
22:50 What were the contributing factors to the inflation spike post 2020?
29:05 How did the United States manage inflation, relative to the rest of the world?
33:26 The opposite of inflation is deflation. What is worse, a 10% rate of inflation or 10% rate of deflation, and why?
35:53 What are some practical ways couples can manage higher prices?
39:16 What is one piece of simple and actionable advice you want to leave our listeners with as it pertains to higher prices?
Sources: Linked Bias Check
(1) Statista
(2) PBS Two Cents is an educational program not evaluated for bias
Note: All government/quasi government sources (e.g., the Federal Reserve) are direct sources of economic information, meaning what is shared are the raw facts. This is why these sources are not scored by organizations dedicated to evaluating bias.
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