Topics covered include:
- What is inflation and what causes it
- What have been the largest contributors to recent high inflation
- Why everyone does not experience inflation in the same way
- Why inflation measures are subjective
- What long-term deflationary forces face the global economy
- What is stagflation and what causes it
- How do we monitor stagflation to see if it is coming
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Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 378. It’s titled “Is stagflation coming?”
What Causes Inflation
Inflation is caused by an increase in the money supply, the number of dollars, and other fiat currencies outstanding, and it’s a function of demand to use those dollars to buy goods and services.
Historically, most of the money supply increase comes from new bank lending; as banks issue new loans, that process leads to money creation.
Money is also created through central bank asset purchase programs, sometimes called quantitative easing, in which a central bank will buy outstanding bonds, and if that happens in combination with the federal government running a deficit, that actually also leads to more money flowing into the economy.
Government statisticians measure inflation by calculating how much the price of items that are included in a reference basket of goods and services changes from one period to the next.
They conduct surveys, they go to stores and see what prices are listed at for various products. In the U.S. there are over 200 categories of goods and services used to calculate the consumer price index. Those goods and services are divided into eight major groups: food and beverages, housing, apparel, transportation, medical care, recreation, education, and communication.
In the February release, about a month ago, the U.S. consumer price index for all urban consumers, known as CPI-U, was 0.6% for the monthly change. And compared to a year ago, January 31st, 2021 to January 31st, 2022, inflation in the U.S. as measured by CPI-U increased 7.5%. That was the highest annual inflation rate in the U.S. in 40 years. Since 1982.
I was in high school then, a long time ago. Back then, a McDonald’s Big Mac sandwich cost just over $1.15. I was very aware of what Big Macs cost at the time because my stepdad insisted that at home we eat only vegetarian meals, so I would go to McDonald’s in order to get some meat.
Those Big Macs took a meaningful percentage of my earnings from part-time work. I was extremely price-sensitive, so I was aware of how prices of Big Macs and other goods went up over time because it cost me more money.
I’ll admit, sometimes I still eat Big Macs. We’ve been traveling for five months, so we’ve spent an inordinate amount of time at McDonald’s drive-through, which in of themselves are interesting social experiments.
As most McDonald’s fast-food restaurants have two drive-through lines, there’s the stress of figuring out “Well, which line will be faster?” Then the two lines merge into one as you go to the pick-up window and to pay.
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