Have you been hearing a lot about inflation, but you’re not sure why it happens or how? Well, you’re not alone. A recent study showed that 88% of Americans have anxiety about inflation.
Inflation is a measurement used to explain why prices go up. However, that’s just the beginning of understanding inflation, its history, how it happens, and what it means for everyone.
Keep reading for a full overview on the topic of inflation.
Why Does Inflation Happen?
Inflation can occur in nearly any product or service. This can include anything from essential needs like housing or medical care to luxury items like jewelry or toys. Several different factors could drive up prices and cause inflation. However, a general rule of inflation states that inflation happens because of an increase in either production costs or desire for a particular product or service.
Cost-push inflation happens when production costs cause prices to go up. The demand for goods stays consistent, while the supply declines because of the increased costs for production. Those costs then get pushed onto the consumers through higher prices, i.e. inflation.
An example of this is the recent inflation in car prices. As part of a recent shortage of a microchip required for cars, overall consumer inflation jumped 7% in 2021—the single largest increase in almost 40 years.
Demand-pull inflation is caused by a surge in consumer demand. When there’s a sudden higher demand for a good or service, the prices for that often jump up. This isn’t usually a concern if it’s short-term, but sustained demand can raise the cost of other goods, which causes demand-pull inflation.
A Brief History of Inflation
The United States inflation by year has traditionally been measured as the percentage of change in product and service prices from one year to the next. According to the Federal Reserve, a healthy rate of inflation is considered 2% per year. However, there have been many highs and lows in the past century.
The year 1937 saw the first peak in expansion 2.9%, which was where the depression resumed after expansive tax hikes were enforced the year before. The following year was -2.8%, evening things out.
The 1940s and 1950s
The next jump was in 1941 at 9.9%, when Pearl Harbor affected the ability to get pretty much anything. The following year saw another 9% increase due to defense spending. Another jump in the mid-40s was called by budget cuts, as the country saw an 18.1% inflation in 1946.
The most dramatic change in the 1950s was a 5.9% increase in 1950 when the Korean War began. This decade was also the last time we saw a negative in inflation: 1954 was -0.7%.
The 1960s and 1970s
In 1968, the moon landing took place, and inflation went up 4.7%. This new standard was followed by a 6.2% increase in 1969 when Nixon took office.
The highest inflation rate of the 70s was in 1973, the year that the gold standard ended. That year, inflation was up 8.7% and jumped again to 12.3% the following year, when Watergate occurred.
The 1980s and 1990s
With help from a brief recession in 1980, inflation was 12.5% back in 1980. However, the highest inflation rate of the 90s occurred in 1990 at 6.1%. The rest of the decade remained between 2.5% and 3.50%
The 2000s and 2010s
The bank crisis occurred in 2007, and overall inflation rose to 4.1%. Inflation remained at or below 3% from 2008 to 2020, jumping up to 7% in 2021.
What This Means in Day to Day Life
Inflation has the possibility of affecting almost any market or service in time, which is why it’s important to understand how it happens and its importance—for example, the cost of an apartment. A $1,000 apartment in 1972 would now cost $7,107.
The value of the dollar has changed over the years, and $1 in 1922 would be the equivalent of $16.74 in 2022. But in some cases, it hasn’t been able to keep up. For example, owning a house was around $79,100 in 1990 (or $447 in rent), and by 2010, it had jumped to $221,800 (or $901).