Inflation in the United States hasn’t been this high in 40 years. We’re at 7 percent inflation. Meaning that if you didn’t get a raise last year, you’re now 7% less able to afford goods and services than you were last year.
And the blame game has started. Whose fault is it? Fiscally irresponsible policymakers? Corporate greed? Putin’s foreign aggression?
As it turns out, none of these are the right places to look.
So how is inflation controlled? And what does it mean for our economy and our wallets?
I’m Cameron Harwick, a professor of economics at SUNY Brockport. Let’s break it down.
Inflation is how economists keep track of how fast average prices are rising in an economy. Prices, meaning it’s plural.
A common mistake people make when thinking about inflation is just looking at one price. And usually that’s the price of gas. But Gas prices are a particularly bad metric for inflation, because its day-to-day price is so dependent on industry-specific supply factors. So, feel free to blame Putin for high gas prices. But if you’re looking to know why all prices are rising across the board, you have to look beyond any particular industry.
That’s why when political figures like Elizabeth Warren blame inflation on corporate greed, or when President Biden blames it on excessive and unfair profits, that might explain high prices in certain industries, but it doesn’t explain rising prices, even in competitive industries.
Did corporations get 7% greedier last year? Are our industries 7% more monopolized than last year? Of course not. And If a company could get 7% more profit just by raising prices, why didn’t they do it last year?
Usually we think of the price of a good as reflecting the supply and demand of that good. But it’s important to remember that a price reflects the supply and demand of two things: not just the good that you’re buying, but also the money that you use to pay for it. And the supply of money is the key to understanding inflation.
Since money is used to pay for everything in an economy, the Supply of money, impacts the price of everything. And the supply of money is determined by the monetary policy of the Federal Reserve, which is the central bank of the United States. Their job is to make sure that the supply of money matches the demand for money.
It’s a delicate tightrope. If the Federal reserve undershoots – you get deflation and recession which means that prices will fall and unemployment rises. And If it overshoots – you get inflation and shortages throughout the supply chain.
When the COVID-19 Pandemic first hit, the demand for money rose, but the Federal Reserve overshot with the supply of money. But you can’t blame that on the president or congress, as many might think.
The government did respond in multiple ways to the pandemic, including sending out stimulus checks. And some people blamed the checks for increasing consumer spending and therefore causing inflation. But the checks themselves don’t affect the supply of money, and they don’t necessarily increase total spending. After all, that money has to come from somewhere. And Congress doesn’t have the ability to print money.
Since the Federal Reserve is operationally independent of congress, Congress can’t ask the Federal Reserve to print more money for them either. Good thing, because they’d likely be running the presses all the time!
So why did the Federal Reserve overshoot, if it wasn’t to pay for the stimulus checks?
Back in 2008, there was a crash in the housing market that spread to the rest of the economy. And when the economy gets rocky, people get cautious and want to hang onto money rather than spending it. In response the Federal Reserve created huge amounts of money to try to match that demand. But it wasn’t enough, and for years they undershot, and unemployment stayed high.
The Federal Reserve doesn’t want to repeat that. So at the beginning of the pandemic, they were much more willing to err on the side of inflation. Now, as the demand for money falls back to normal levels during the recovery, the Fed is scrambling to undo a lot of that expansion.
Now with inflation at 7%, it’s natural to wonder: Will the US lose control of inflation and go the way of Venezuela, with an inflation rate in the tens of millions?
That’s what we would call hyperinflation. And that happens when a government’s deficit is so bad that the only way they can pay their bills is to force the central bank to print money for them.
While the US does have an uncomfortably large debt burden, there’s no sign that Congress will have to rely on the Federal Reserve like that anytime soon. In fact, the Federal Reserve has been cautiously contracting for months now. They don’t want to go too quickly, or we could land in a recession that’s worse than the inflation. It’s happened before in 1980, when they tried to get the 14% inflation of the 70s under control.
But if the Federal Reserve doesn’t make any huge missteps, we should expect to see inflation fall slowly over the next year or two until we’re back at their target rate of about 2%.
Economics Professor Cameron Harwick explains government debt, the debt ceiling, and what it means when we hit it.
After Covid, inflation in the US – and worldwide – soared to levels not seen since the 1970s. And during that time, we’ve been treated to a steady stream of proclamations that economists were blindsided by it. And as economists argued about supply-side vs demand-side explanations, more off-the-wall theories took the . . .
As the US has come down from high inflation over the past year, a gulf has opened between economists, triumphant over low inflation and no recession, and consumers, who still feel financially precarious. Economists, looking at the data, wonder why consumers can’t appreciate how good things are. Consumers, for their . . .
aslamtu
Jun 04, 2022 at 10:16 |Well done.
Splash Autumn
Jul 10, 2022 at 10:22 |Make more economics videos pls
Yasin Nabi
Jul 16, 2022 at 15:54 |WOwww this is awesome. enjoyed watching :) thanks for sharing.,,.
dboy6400
Jul 18, 2022 at 21:03 |Pretty good but leaves out the significance of the government passing spending laws or Executive Orders, which cause the Treasury Dept to sell bonds to the Fed through big banks, then the Fed creates it.
Justin Lindfors
Aug 08, 2022 at 19:12 |Meanwhile Ben Shapiro and other conservatives blaiming biden for inflation…
Basically because of the pandemic now an epidemic inflation is gonna skyrocket until things settle down and inflation shrinks back down by 2024.
George P
Sep 22, 2022 at 15:36 |“Uncomfortably large national debt”… That’s putting it lightly
Tron_23
Oct 12, 2022 at 22:43Not really because if you look at “national debt” it’s mostly loans for mortgages, vehicles, and retirement plans. This is called public debt and overwhelming majority of that is and always has been paid back.
Krypto Blogger
Oct 12, 2022 at 1:25 |But how they are going to pay their debt if Debt vs GDP is 130%? They spend more than they make. They have to print money or am I wrong?
Dean Does Mapping
Jan 06, 2023 at 21:27Printing more money doesn’t create more money. Printing more money just decreases the value of the currency. Just ask Zimbabwe, Venezuela or the German Weimar Republic. When there isn’t a lot of currency floating around, the currency becomes stronger such as Kuwait
Tron_23
Oct 12, 2022 at 22:26 |Explain if forgiving school loans will effect inflation. I certainly hear both sides making different claims.
Cameron Harwick
Feb 17, 2023 at 3:01Gotchu fam https://www.youtube.com/watch?v=DLR6rk6F1wY
JumpingJack6
Nov 14, 2022 at 15:09 |Democrats were elected in 2020 and they spend 2 trillion on nothing. All the money was printed…. Hence inflation. It is not complicate.
Pedro David
Dec 06, 2022 at 12:29 |this guy is a clown. how can you compare venezuela’s inflation to the US economy when venezuela has been dealing with hard sanctions from the us goverment for years, especially when the us government is aware of venezuela’s massive oil reserves especially when hugo chavez tried to use to nationalize to help his own people to better venezuelan lives. what a clown!!!
klevdavful
Jan 02, 2023 at 15:16 |Intresting take .
Batman Ecstasy
Jan 09, 2023 at 1:35 |Proffesor with due to Respect I would like to State… You are an educated Person knowing Everything what You have Read in Books on your fingertips which is Right..
But Your philosophy doesn’t match the Ground reality which is far beyond the books.. Joe Biden is not blaming he is the Supreme president knows everything that are going under the table.. and the Reason is crypto trading(Easy Money)
Arianne Duc
Feb 02, 2023 at 17:00 |is there a financial crisis this 2023?
tammy clough
Feb 08, 2023 at 11:53 |Tries to blame putin for high gas prices yet we were seeing them in canada long before Russia went into Ukraine. I can’t believe he doesn’t think politicians are to blame who makes the monetary policies? Politicians.
Amelia Rodríguez
Mar 29, 2023 at 15:12 |America is currently plagued by the hydra-headed evil duo of inflation and recession. The worst part about this recession is that consumers are racking up credit card debt. In April alone, credit card debt went up 20% while rates have doubled in a year. Inflation is so high that consumers are literally taking debt for basic life necessities. Collapse has indeed begun. Layoffs will get worse. Which is why I’m looking to enter the market now and ride along as the economy gets back on track. I’m building a $550k portfolio. Any stock recommendations?
MrMath2001
May 19, 2023 at 12:59 |If the inflation over the last year is, say 10%, a rough figure perhaps, why can’t I force the IRS to tax me on $90 for every $100 I earn, and claim the rest from the Feds?