The U.S. economy enters a period of inflation when the prices of goods and services continue to rise over time. If you go to the grocery store and chicken thighs are more expensive every week or head to the gas station and fuel prices are consistently higher every time you fill your car, you know the country is in a period of inflation. When prices rise at a faster pace than do workers' wages, people feel an economic pinch. It now costs them more money that they don't necessarily have to fill up their cars, buy groceries, purchase electronics or order shoes or clothes online. This could cause consumers to reduce their discretionary spending: If it costs consumers $150 to fill up their grocery carts this month when just 3 weeks earlier it cost them $130, they might spend less on other items.
"The impact of inflation is felt by everyone," says Dan Belcher, founder and CEO at Oklahoma City-based Mortgage Relief. "Homeowners can prepare for situations like this by paying off credit card debt and opting for a fixed-rate mortgage rather than an adjustable-rate mortgage."
Supply Side Inflation
During the earliest days of the COVID-19 pandemic, shutdowns and stay-at-home orders helped bring the production and shipping of goods across the world to a standstill. The increased demand that resulted for these products then boosted the price of them. This is an example of supply-side inflation, a type of inflation caused by a slowdown in the supply of goods and services.
Automakers, for instance, are still dealing with a low supply of the semiconductor chips needed for the higher-tech features of new cars. Home builders are still dealing with a shortage of construction materials. Both of these shortages are causing price increases, making new cars and new homes more expensive.
Demand Side Inflation
Another type of inflation is demand-side inflation. This happens when an increase in demand for goods and services causes prices to rise for them.
Again, COVID-19 played a role in causing the United States to get hit with this kind of inflation. To help people through the pandemic, the federal government passed out stimulus checks to many taxpayers. At the same time, people had more disposable income because thanks to stay-at-home orders and business closures, they weren’t spending as much money on entertainment.
This fueled demand for online shopping, as consumers ordered entertainment centers, new TVs, computers, smartphones, exercise equipment, outdoor toys and other items to entertain themselves. As demand for these items rose, so did shortages and prices.
Demand-side inflation also played a role in boosting the price of homes. Many people decided to move during the pandemic, whether from apartments to single-family homes or from smaller homes to larger ones. This boosted demand for homes and launched the U.S. into a prolonged seller’s market, in which buyers engaged in bidding wars to get their offer accepted. This caused the price of single-family homes to skyrocket throughout the pandemic. The National Association of REALTORS® reported that the median sales price for existing U.S. homes hit $357,300 in February 2022. That’s up 15% from one year earlier.
Other big-ticket items saw their prices rise as demand increased, too. Kelly Blue Book reported that the price that U.S. residents paid for an average new car rose by $6,220 in 2021. The company reported that Americans paid an average of $47,077 for new cars in December of 2021, the first time this figure ever rose past $47,000.
Inflation Spiral
Inflation is so worrisome because it can affect so much of the economy, with rising costs spreading from one sector of the economy to the next.
This, too, happened during the pandemic. Shortages in certain products, such as toilet paper and hand sanitizer, caused consumers to overbuy and stock up on these items. That further reduced the supply and causes the prices of these items to rise even higher.
Empty store shelves tend to cause consumers to panic. They might overbuy, say, chicken breasts at the grocery store because they worry that they won’t be there the next time they shop. This causes shortages and the price of these food items to continue to rise.
