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A breakdown of how inflation works, what causes it, and when we can expect prices to go back down

From Dec. 2020 to Dec. 2021, the Bureau of Labor Statistics reports consumer prices rose 7.5%. That's the largest percent change in more than four decades.

PENNSYLVANIA, USA — Inflation is high, and has been for months.

From Dec. 2020 to Dec. 2021, the Bureau of Labor Statistics reports consumer prices rose 7.5%. That's the largest percent change during a calendar year in more than four decades.

That price increase is taking a toll on consumer confidence and could potentially eat into your hard-earned paycheck.

But what causes prices to increase so sharply? It's simple economics: supply and demand.

Let’s start by getting a concrete definition of what inflation actually is.

“Inflation is a persistent increase in the overall price level, or the aggregate price level," Associate Professor of Economics at Franklin & Marshall College Dr. Yeva Nersisyan said. "So, it's not the change in the price of the overall product, it's when prices overall are going up.”

Here's where the basic lesson in economics starts. COVID-19 cases have been on the decline recently and the economy is starting to recover from the pandemic-induced recession. Households are consuming more and spending more, whether it's due to money saved during the pandemic or a recent wage increase.

“At a certain point, we may push up against the economy's ability to produce and so prices might go up," Dr. Nersisyan said. "We can’t produce more, so prices go up.” 

Dr. Nersisyan says the economy isn’t currently able to keep up with increasing consumer demand and manufacturers are struggling to reach pre-pandemic levels of production. Simply put: supply can’t keep up with demand. That means suppliers can increase the price of their goods with relatively high assurances that people will still purchase them.

The Consumer Price Index, or CPI, tracks inflation. This past year, the CPI ballooned to 7%, the highest it's been since 1982. The Federal Government calculates inflation via the CPI on a monthly basis.

“They survey our households to determine what is it that the average household consumes to come up with this representative basket of goods and services, and then they track the value of this basket over time, and that's your CPI,” Dr. Nersisyan explained. “It reduces the purchasing power of your income. If your wages were to increase with inflation, of course then your purchasing power would not decrease.”

So, what does this mean for your budget? If your wages aren't increasing, your money won't go as far and it may be harder to afford day-to-day items.

There is some good news, though. Experts predict inflation rates will eventually go down, it just depends on how quickly manufacturers can increase supply.

“Our baseline expectation is that supply bottlenecks and shortages will persist into next year...and elevated inflation as well, and that as the pandemic subsides, inflation will decline from today's elevated levels,” Chair of the Federal Reserve of the United States, Jerome Powell, said at the end of last year.

Experts say for inflation numbers to subside, suppliers need to ramp up production to meet the current market needs.

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