The Surge in Inflation in the US and Globally (Episode 8)

To begin, I would like to define inflation. Inflation is, as Jeanna Smialek wrote for the New York Times, “a loss of purchasing power over time … [meaning] your dollar will not go as far tomorrow as it did today.” Inflation causes the value of currency to decline and subsequently the price of commodities to increase. In other words, it’s the rate at which prices rise. Things cost more over time.

Within the United States, two primary indexes measure the rate of inflation: the Personal Consumption Expenditures index, also known as the P.C.E., and the Consumer Price Index, or C.P.I. On average, the Federal Reserve aims for a 2% annual increase in the P.C.E. Index, which is essentially a 2% increase in the price of consumer goods. The Federal Reserve is the U.S. government’s central banking system and its job is to set monetary policy. One way it does this is by setting the overnight lending rate which acts as the baseline interest rate for banks in the U.S. According to The Balance, the “fed funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight. The nation’s central bank uses it in addition to other tools to promote economic stability by raising or lowering the cost of borrowing.” The overnight lending rate is typically the cheapest interest rate available at any given time. When interest rates are high, borrowing usually declines, slowing down the economy and decreasing inflation. Conversely, when interest rates are low, more people are able and willing to borrow money, so the economy grows and there is more money in the system. When there is more capital in the economy, inflation increases. The economy is like a train, and the Federal Reserve wants to be the conductor. The train has momentum on its own, but the Federal Reserve can put its foot on the gas pedal and try to increase the speed of the train by lowering interest rates, or it can try to slow the train down by raising interest rates which is like hitting the brakes.

Currently, the world is experiencing a period of unusually high inflation. The United States exited 2021 with an inflation rate of over 7%, the highest since 1982. By January of 2022, the rate of inflation had climbed to 7.5%. Britain closed out 2021 with a rate of 5.4%, and the Eurozone ended the year with an inflation rate of 5.1%, the highest since 1997, when records began for the EU. In Canada, prices are increasing at their fastest rate in thirty years.