Inflation explained: How prices took off
The U.S. economy (our red balloon here) is the biggest in the world. It is resilient and strong, but in the past two years, it has faced the biggest challenges in a generation on multiple fronts. It contracted too fast. Then it grew too quickly. This has forced millions of Americans to live through something they have never lived through before: a period of high inflation, which is what happens when prices go up, up, up.
This series is an examination of some of the most prominent economic themes of the year, explaining to readers their origins and impact during this highly uncertain period. These topics affect the finances of all Americans, and understanding what is happening can make you better prepared for what happens next.
In February 2020, the U.S. economy was in good health. Unemployment was low. The stock market was high. Everything seemed to be going great.
Then the coronavirus pandemic arrived. Millions of people lost their jobs. Companies closed. The economy shrank. It was a scary time.
With the economy at risk of completely deflating, help rushed in.
The Federal Reserve pumped money in. The White House and Congress offered trillions of dollars to help families and companies. Businesses started to reopen, hiring workers again.
At the beginning of 2021, it looked like all these things had saved the day. The country, everyone thought, was back on track. Millions of Americans got vaccinated and felt safe.
Children were back in school. Sports leagues were reopening. The scariest days of the pandemic appeared to be behind us.
So the economy would just resume growing in its normal way, right?
The economy, it turned out, was actually growing too fast.
People were spending more money than anyone had expected, buying furniture, cars, houses and groceries. This made everything more expensive. It was hard to supply all the things people wanted to buy as fast as they wanted to buy them. So prices went up.
Sometimes, when prices go up, people stop spending money because they think it’s too expensive. But this time, something strange happened. They bought more. And more. And more.
This made prices go higher. And higher. And higher.
The Federal Reserve (led by Chair Jerome H. Powell) is now trying to help get this inflation under control. It has started raising interest rates, which is meant to let a little bit of air out of the economy.
Not too much air (they hope!), but just enough. They want to bring the economy back to earth.
But it’s not so simple. There are new dangers lurking. Russia’s invasion of Ukraine has created an entirely new crisis, pushing up the prices of things like gasoline and wheat.
What happens next? We aren’t sure. The economy is being pulled in different directions.
Raising interest rates should slow inflation. But these aren’t normal times. There’s a war in Europe. Coronavirus surges are keeping the pandemic going. If the Federal Reserve raises rates too much, it could be bad for the economy. But if the Federal Reserve doesn’t raise them enough, inflation could drive prices to new highs. That’s a lot of pressure on families struggling to pay the bills.
The hope is to get the balance just right to keep the balloon, er, economy, in a safe place.