Many people worry about inflation because it erodes the purchasing power of savings and reduces the value of loans. But inflation can also boost economic growth if it increases the demand for goods and services, leading to higher prices and more jobs. The problem is that inflation that becomes persistent can damage the economy by causing higher borrowing costs for businesses and households and making consumers reluctant to spend, even when they can afford it.
Economists usually divide the causes of inflation into two categories: demand-pull and cost-push inflation. Demand-pull inflation happens when companies raise prices in response to higher wages or material costs, and those price increases cycle back into higher consumer spending. But other forces don’t fit neatly into either category.
A big reason for the 2021-2022 inflation surge was that global oil and commodity prices soared, leading to higher energy costs for consumers. Another factor was a rise in core inflation, which reflects the average wage that workers receive and the rate at which firms increase their prices for goods and services. Finally, the reopening of contact-intensive service sectors after the COVID-19 pandemic caused a backlog of work orders that drove up wage pressures and led to more price changes.
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