Inflation is a complicated concept. Generally, economists lump it into two categories: demand-pull inflation and cost-push inflation. But those categories can get a little murky, especially when multiple forces intersect. The recent inflation surge is a case in point.
Demand-pull inflation happens when consumers’ resilient interest for a good or service outpaces the supply of that product or service, and so prices rise. Massive pent-up demand from lockdowns and stockpiles of savings helped trigger this kind of inflation. Companies struggled to keep pace with the robust demand, and so inflated their prices to compensate for the shortages.
The other type of inflation is cost-push, and it involves prices rising because production is more expensive. This usually occurs when wages or material prices increase, and companies pass those higher costs onto consumers through price increases. Cost-push inflation is most common during a downturn, and it tends to be the most destructive for the economy.
When prices move fast, it’s hard for consumers to keep up with them, and their purchasing power erodes as a result. That’s wallet-harming inflation, and it can be especially harmful for lower-income people who may spend a larger share of their income on necessities.
Inflation has slowed since the end of the coronavirus pandemic, but it’s still at an elevated level by historical standards. We’ll need to continue tackling the underlying factors that drove it in order to bring inflation back to the Fed’s target of about 2%.
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