Inflation 101: Why is everything so expensive?

Inflation has hit a 40-year high in the US, making life more expensive. UW economics professor Thomas Gilbert explains the situation. #newdaynw

Noticed a price increase at your local grocery store or favorite coffee shop? Many people are cutting back on spending thanks to the sharpest rise in inflation since 1981.

There has been a lot of talk about inflation lately, but what is it and why? is everything so expensive? University of Washington associate economic professor Thomas Gilbert came to New Day to explain.

In short, inflation is simply an increase in the prices of goods and services. Professor Gilbert explained that there are three main drivers of inflation: supply, demand and expectations.

The COVID-19 pandemic continues to cause supply problems, ports are congested, there are not enough truck drivers, etc. These supply problems have also been exacerbated by the recent Russian invasion of Ukraine.

On the demand side, the demand for goods and services is skyrocketing as people get back to doing things and getting back to a normal routine. Gilbert also noted that people have been saving more during the pandemic, so on average they’ve drained bank accounts and have more money to spend.

Rising wages also contribute to higher prices as companies raise consumer prices to maintain margins. The falling supply and rising demand creates a kind of perfect storm for inflation.

While it’s been great that the government has been able to financially support businesses and individuals during the pandemic, Gilbert said it’s not a sustainable practice as “printing more money” will only increase demand and create more inflation.

The question remains: How can the government slow down this vicious cycle of inflation, or even better, reverse it?

Gilbert explained that the Federal Reserve, the main banking system in the United States, can’t do much about the supply side of the coin, but it can affect demand through rising interest rates. It’s important that interest rates rise to curb demand, but not too quickly as this could lead to economic collapse.

One thing Gilbert recommended in times of inflation: keep saving. Don’t think that just because prices go up, you have to stop saving to sustain your lifestyle. Gilbert said he should keep saving as that money will multiply in the years to come.

Segment Producer Rebecca Perry. Watch New Day Northwest at 11am on weekdays KING 5 and live streaming at Contact New Day. Inflation 101: Why is everything so expensive?

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