What is Inflation and Why is it a Problem?


Isabella Luse

  When you turn on the news, you may hear a lot of things. President problems. COVID-19. The list goes on and on. On almost every finance channel, and in many other segments, a large problem is also arriving for economists: Inflation. But this “inflation” is not just a simple term. It does matter, and it’s important for everyone. Why, though? What even is it anyway?

   To put it in perspective, Inflation is the increase of a product’s value over time. Gas is probably the best example that most people would notice. In 1961, 60 years ago, the average price per gallon of gas was .31 cents. Now, as of May 17th, 2021, the current gas price is $3.04. This rise in price over time is what can be called Inflation. The average inflation rate, or how much a price grows each year, stays around 2%. But, like many other things with COVID-19, the inflation rate was affected as well. From last year, at the beginning of the pandemic, to April 2021, the inflation rate was a staggering 4.2%. It’s only several points higher, you think, so why is it so concerning?

   Well, it is kind of like a chain reaction, a very large chain reaction. According to PIMCO, “As an economy grows, businesses and consumers spend more money on goods and services. In the growth stage of an economic cycle, demand typically outstrips the supply of goods, and producers can raise their prices. As a result, the rate of inflation increases.”  This means that there is less of a product to buy, yet the producers still need to make the same amount of money. So, the prices increase. But, there can also be deflation, which, according to PIMCO once again, is “When prices actually fall, deflation has taken root. This occurred in Japan in 1995, from 1999 to 2003, and more recently from 2009 to 2012. Often the result of prolonged weak demand, deflation can lead to recession and even depression.”  For example, this year, you heard a lot about car loans that have 0% interest, and other great deals on houses and such. When this type of deflation happens, there is a lot of a product that is no longer selling, or demanded, and the price will lower. These types of inflations and deflations always happen, but right now, the economy is suffering from great inflation.

The economy is a complicated topic, but it can still be discussed nevertheless.

  For example, one thing that came in great demand this year was computers. Everyone was working from home, so computers were essential. But, there wasn’t always enough, and like noted earlier, they still needed to get the money. So, prices rose. This happened with many other products as well, like gas, after last week’s ransomware situation, food, and much more. So now, there are shortages, and people are working hard to create more of these products. 

The economy is something of an unbalanced system. There will be inflations and deflations, but the ones that were caused by COVID-19 were unthinkable. Now, with hundreds of thousands out of work, new laws and bills, and products that are needed, it can sometimes be hard to see what may come next. It is with high hopes that everything will return to (an almost) normal within a couple of years, but at the moment, inflation is a problem, with few solutions.