3. What are the causes of inflation? How is inflation measured?

What are the causes of inflation?

There are three primary causes of inflation, each known by a different name.

Demand-pull inflation

The demand-pull effect occurs when the demand for goods and services outpaces the supply. Buyers are willing to pay more, and so the suppliers increase the price accordingly. This creates demand-pull inflation.

Cost-push inflation

The cost-push effect occurs when the cost to produce a product increases. This might include an increase in labor costs or the costs of the raw material to produce a product.
When the costs at one end of the supply chain increase, those costs typically trickle down to consumers. This creates cost-push inflation.

Built-in inflation

The final type of inflation, which occurs in a cycle, is built-in inflation. As the price of goods and services goes up, wages have to go up, too. As wages increase, so does the cost of doing business. So, prices must increase as well.
This creates a cycle of built-in inflation.

What was the inflation rate in recent years?

Each year, economists determine what the inflation rate was for the previous 12 months. Each year, we can expect this number to be different based on what is happening in the economy. In the past several years, the rate of inflation has stayed relatively consistent.
For example, the inflation rate in October 2022 was 7.75% — meaning it would cost about 2 pennies more to buy the same basket of goods and services at the end of the year compared to at the beginning of the year.
The inflation rate in 2020 was 1.2%. The inflation rate for 2021 was 4.7%. The inflation rate for 2022 is projected to be 8.2%.
The numbers we’ve discussed apply to the dollar in general, but inflation rates can also vary from state to state and from city to city.
While the inflation rate has started to accelerate over the past few years in the United States, that has not always been the case.
History has seen the U.S. inflation rate rise to 14% in 1947. It has fallen by as much as 11% in 1921. When inflation is negative — that is, when a dollar or other currency can suddenly buy more goods and services than before — that is known as deflation. For the last half-century, we have generally seen inflation, not deflation, in prices.
Considerable increases in inflation are known as hyperinflation.
A significant event in the economy usually causes a bout of significant inflation or deflation.
Periods of inflation and deflation will often correlate with bull and bear markets. A bull market is more likely to see inflation; a bear market is more likely to see deflation.