At some point in a person’s life, they will experience a rise in prices for goods and services, known as inflation. Inflation can occur in nearly every product or service; from need-based expenses like food and housing to want-based expenses like cosmetics, automobiles, jewelry, and electronics. This is a very big concern because money saved today becomes less valuable tomorrow.
What Causes Inflation?
There are many various reasons as to what causes inflation, but the two biggest proponents are cost-push inflation and demand-pull inflation.
Cost-push inflation occurs when the costs of production increase, like raw materials or wages. The cost of production increasing is most likely due to a decline in supplies of goods while the demand for the finished product remains unchanged. For example, the sharp rise in the price of goods that Americans saw in 2022 was mainly due to a shortage of the supply of various goods.
Demand-pull inflation occurs when there is a strong demand for a certain product or service. As demand increases for a product or service while the supply remains constant, the price of the product or service will increase. For example, the sharp rise in the cost of homes that Americans saw in 2022 was mainly due to a sharp rise in demand for home ownership.
Measures of Inflation
There are many metrics used to calculate inflation. The two most popular metrics used to calculate inflation are the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI, often the metric of choice in measuring inflation, measures the price for a basket of goods and services, including food, cars, education, and recreation. Changes in this basket are changes in prices across the entire economy. This metric measures inflation from the consumer viewpoint. The PPI measures the price change affecting domestic producers. It prices fuel, farm products, chemical products, and metals. This metric measures inflation from the producer viewpoint.
Who Combats Inflation?
Central banks in developing countries monitor inflation. In the United States, the Federal Reserve, also known as “The Fed,” is the central bank that monitors inflation. Through monetary policy, the Fed can prevent or control inflation by changing interest rates with the hope that it controls consumer spending.
Governments through fiscal policy can also assist in fighting inflation. Reduced spending and increased taxes are a way that governments, through fiscal policy, can fight inflation.
First State Investment Advisors has over 50 years of experience investing through inflation. For a free consultation, call us today at (918) 492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.