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AUBURN UNIVERSITY, Ala. – Inflation is a word that is being thrown around a lot in today’s media market. What is inflation? What is causing it? How does it affect me? These are all questions that consumers could be asking themselves right now. An Alabama Cooperative Extension System economist sheds some light on these questions and more.
What is inflation?
In basic terms, inflation is when there is a decrease in the purchasing value of money. Wendiam Sawadgo, an Alabama Extension assistant professor and economist, said with inflation, a dollar can purchase less than it did in the past.
“We oftentimes think of price increases as inflation, but a price increase can be caused by factors other than inflation,” Sawadgo said. “For example, if the price of a hamburger goes up, it could be due to inflation. However, it could also be due to beef prices increasing because of a drought that led to a decreased supply of cattle.”
When measuring inflation, Sawadgo said economists will often examine a particular bundle of goods that households may purchase. They will then evaluate what the price was for that same bundle of goods over different time periods. An example of this is the consumer price index (CPI).
“Right now, we are seeing prices increase, with a 0.9 percent increase in the CPI (seasonally adjusted) from September to October,” he said. “The CPI increased 6.2 percent from October 2020 to October 2021.”
What is causing the current situation?
Sawadgo said economists have some mixed perspectives on what is causing the increased prices.
“One factor could be the increased demand for goods following the COVID-19 pandemic, coupled with a reduced supply of those same goods,” Sawadgo said. “This reduced supply has been in part due to supply-chain disruptions from COVID-19.”
There is no one single sector where prices are rising. Instead, there are multiple areas that have experienced price increases. Working together, these are all contributing to the current situation.
- Energy is leading the pack as the largest contributor. The energy index increased 4.8 percent over September this year and 30 percent from last October.
- Another somewhat unusual contributor earlier this year was the used vehicle market. The prices for used cars and trucks were up 26.4 percent from last year.
- Food prices are also up, rising 0.9 percent in October and 6.2 percent over the last year.
“With the higher energy prices, consumers are likely spending more filling up their vehicles with fuel,” he said. “Increased food prices might also be affecting the average consumer’s budget. For example, beef prices have been noticeably up.”
When will prices start to decrease?
Because there are so many elements contributing to the problem, it is tough to know when prices will return to normal. Sawadgo said the supply chain issues may worsen because of the current labor shortages, but that is assuming that the labor demand rises.
“A record 4.4 million people—or three percent of the labor market—quit their jobs in September,” he said. “Combining the pandemic risks with how employment has changed during the pandemic, this could restrict the labor supply for the near future. So, in short, prices returning to normal likely depends on the labor supply increasing to meet labor demand.”
In the meantime, there may be some ways for consumers to combat higher prices.
“Because not all products have seen equal price increases, people may be able to shift their consumption to goods that have been more sheltered from price increases,” Sawadgo said.
A consumer’s food budget is an example of making this shift; take beef for example. Since beef has seen a 20 percent increase over the last year, people can make the switch to less affected products like chicken, which has only seen an 8.8 percent increase.
The Alabama Extension Making LIFE Work publication series is designed to help residents during challenging times. These resources provide information on overcoming hurdles related to both family and finances. Visit the Alabama Extension website at www.aces.edu to find these resources. For more information on the current situation and how it affects you, contact Sawadgo or another member of the Extension farm and agribusiness management team.