Why Is Inflation So High? Plus How Your Wallet Can Survive

December 21, 2022 by Josh Dudick

In the past few months, Americans have seen a sharp increase in the price of many essential goods and services. With salaries staying the same, this inflationary trend has frustrated many people, leaving them concerned about the future.  The latest consumer price index (CPI) reports a 7.7% increase in inflation over the last year (a 40-year high). This inflation data shows that the average American family spends more each month to cover basic living expenses.

Which begs the question – why is inflation so high?

While there is no single factor that can fully explain this trend, there are a few key drivers that have contributed. Here are some of the culprits.

Too Much Money in The System

The COVID-19 pandemic necessitated a prolonged lockdown, keeping people inside their homes and businesses closed. While this helped curb the spread of the virus, it led to an overabundance of funds in the system.

People spent less, but cash was in surplus, driving inflation. America’s economic stimulus package was an additional influx of funds into the economy, further contributing to inflation. According to the Federal Reserve, Americans had extra savings of $2.3 trillion from 2020 to mid-2021 – that’s a lot.

All these got reinforced by shortages of everything from food to other household items, so people had less to buy. In the end, people started spending on whatever was left and, by so doing, bumping up the prices of these items.

Supply and Demand Imbalances

When there is more demand for a good than available supply, the price goes up. People are willing to pay more for goods when they are insufficient, racking up inflation figures.

At the height of the pandemic, when spending dropped and savings increased, the demand for goods and services decreased. But now that we have emerged from this crisis, people are more willing to spend, increasing demand.

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