$100 Isn’t Worth The Same Anymore – Here’s How Much It’s Changed
(USNewsMag.com) – If you pay any attention to the news at all, you’ll know that inflation is one of the biggest stories right now. It’s currently running at more than four times the Federal Reserve’s 2% target rate, and the Biden administration can’t seem to bring it under control. Inflation can be confusing, though. We all know it means prices are rising, but what causes it, and what’s its actual impact on ordinary Americans?
What Is Inflation?
Inflation is a general rise in prices. The key part of that is general; if the price of one thing rises and everything else doesn’t, that’s not inflation. To measure inflation, economists create a “basket” of common goods and services that represents what the typical families spend their money on and track how the price of that basket changes. The average cost of the basket is called a Consumer Price Index (CPI).
Right now, the CPI shows that inflation is running at around 8.5%, slightly down on June’s peak of 9.1% but still far above the 2% or so it’s hovered around for more than a decade. Dramatic rises in the prices of energy, food, and gas are catching the headlines, but the data shows that even with those things excluded, the underlying rate of inflation is still over 6%. Why has it suddenly spiked after being low and relatively stable for so long?
What Causes Inflation?
Inflation happens when some aspect of the economy is pushing prices up across a wide range of products. Usually, this happens because of the law of supply and demand, one of the basic rules of economics. Right now, the economy has been flooded with cash through COVID spending and stimulus payments, and because there’s much more money in the economy, demand has risen. At the same time, the supply of goods and services is down because of global supply chain issues and closures during the pandemic.
It’s not hard to predict what happens — prices rise, reducing demand until it matches the supply. This won’t change unless cash is taken out of the economy, which the Fed is trying to do by raising interest rates, or until supply increases again.
What Does It Mean For Us?
The bottom line is that higher inflation means our money doesn’t go as far as it did previously. What $100 will buy you today, you could have got for $85 three years ago. Wages are rising too, but not as fast as prices. Average earnings went up by 5.2% over the last year, while inflation rose 8.5% in the same period. That means it takes $100 today to purchase what could have been bought for $96.70 last July. Although raw wages have gone up by 5.2%, real wages are down by 3.3% — and for struggling Americans, that’s painful to swallow.
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