“Inflation hit a fresh 39-year high in December.” This was a headline a few days ago in USA Today. The consumer price index, which measures prices that we pay for goods and services, is at a sky-high of 7%. Car prices are up by 40%. The state of Michigan is seeing gas prices go from $2.10 in August 2020 to $3.46 per gallon as of February 2022. That’s nearly a two-fold increase in gas prices for the state of Michigan in the span of 18 months. These high inflation levels have led many to wonder: what is contributing to this staggering rise in prices?

Multiple factors are contributing to the high rates of inflation at the moment. One of these factors is the reopening of the economy. Lockdowns were implemented back in March 2020. As a result, people spent less (i.e., airfare and travel) while being stuck at home. When vaccines came out in early 2021 and lockdowns started to lift, life slowly transitioned to normalcy. People went back to pre-pandemic spending habits (which meant increased spending), driving up demand and thus prices. Another contributing factor is supply chain issues in the world’s economy. Right now, there is an ongoing chip shortage that is limiting the production of cars and PCs (I guess my friend Zack will have to wait for that new gaming PC). A low supply of cars and PCs because of such chip shortages will ultimately raise prices. Let’s also not forget when a container ship blocked the Suez canal back in March 2021 for six days, preventing 9.6 billion dollars worth of trade from passing through the canal. Lastly, millions of people lost their jobs in the recession due to the pandemic. Thus, the government started giving out a lot of unemployment and stimulus checks to those people. This incentivizes people to stay at home and not search for jobs. As a result, employers now have difficulty finding workers, leading to low numbers of goods and services to satisfy demand (low supply = high prices). 

Inflation has widespread implications for consumers. If people see an increase in their wages, they can still afford the same goods as in the past. On the other hand, if people’s wages stagnate, consumers will afford less with the same amount of money they had in the past. 

When will this inflation frenzy stop? It starts with the federal reserve hiking up interest rates. In other words, the federal government is implementing taxes on goods and services from all sectors such as banking, agriculture, and education. By artificially boosting prices through interest rates, high prices will deter high levels of spending and, as a result, lower demand. Low demand from high prices will ultimately lead to sellers lowering their costs to attract more consumers. We will return to a world with lower inflation and regular prices when this happens.