Pandemic-related forces have helped bump up prices, including for gasoline, where production has lagged behind surging demand as Covid-19 appears to fade
By David Harrison and Gabriel T. Rubin – The Wall Street Journal.
U.S. inflation is at its highest rate in nearly four decades, reaching 7% in December from a year ago. Consumers are seeing prices rise sharply for a variety of goods and services because strong demand is colliding with persistent supply shortages.
Inflation is one of the most vexing problems facing economists and government policy makers. The causes are myriad, and the tools usually deployed to tame price pressures can, in some scenarios, push the economy into a recession.
Here’s what to know:
What is inflation?
Inflation reflects the broad rise of prices or the fall in the value of money. It generally results from too much demand chasing too few goods or limited services, leading to price increases. Inflated prices don’t necessarily hurt the economy as a whole, and only those consumers making purchases experience the increase.
For example, for much of the past year new auto prices have jumped because of vehicle shortages driven by a lack of components such as semiconductors. While there have been ripple effects—such as more demand and higher prices for used cars, given the shortage of new ones—the increase in auto prices doesn’t necessarily affect you unless you want to buy a vehicle.
Higher prices in one sector don’t necessarily lead to general inflation across the economy. But price increases across a range of categories will weaken consumers’ spending power.
What is causing inflation?
The current bout of inflation has several causes, many linked to the pandemic. For one, consumers are flush with savings from government stimulus programs and depressed services spending as a result of restrictions on businesses, leading them to open the spigot for goods that are in scarce supply.
Fewer workers are in the labor market, encouraging those who are working to demand raises. These factors and many others are driving up costs.
Energy prices, including gasoline, have gone up as oil-and-gas production lags behind a return of consumer demand coming out of the pandemic. The revived demand has also led to supply-chain disruptions. Truck drivers, seaport slots and warehouse spaces are all in short supply, leading to costly delays and rising shipping rates for goods.
The added costs, at every step from production to sale, lead to price increases for consumers, with some companies seizing on a rare opportunity to raise prices.
How is inflation measured?
There are different ways of measuring inflation, even among government agencies. The shorthand version comes from the Labor Department’s consumer-price index, or CPI, which is calculated using a survey of households and only covers spending on goods and services. It excludes expenditures that aren’t paid for directly, such as medical care paid for by a person’s health insurance. Its limited set of expenditures can make CPI more volatile.
The personal-consumption-expenditures price index, or PCE, takes into account a broader range of expenditures—and feedback from businesses—to provide a more expansive picture of price changes. This inflation reading is the Federal Reserve’s preferred measurement. The Commerce Department releases its PCE estimate monthly as part of its income and spending report.
Just how fast are prices rising?
The CPI is up 7% from a year ago, according to the Labor Department’s report for December. With food and energy removed from the picture—prices in those categories can be volatile—CPI is up at a slightly lower rate of 5.5%. The readings, however, show that price increases are widespread and well above policy makers’ targets for annual inflation, which hover around 2% on average.
That pace is the fastest 12-month gain for core inflation since 1991, which means a third of the nation has never seen a similar stretch of price gains.
The Commerce Department releases its PCE estimate monthly as part of its income and spending report.