Inflation has been outpacing nominal wage growth for a while, meaning that Americans can afford less now that in previous years. Despite rising wages on paper, the rapid growth of consumer prices has resulted in an overall decline in real hourly earnings in the last 12 months.
Crude oil prices and retail prices of gasoline have also reached extremely high levels. Although U.S. dependence on Russian crude oil has waned due to increased domestic oil production, monthly gas prices in the United States have been steadily rising through 2021 and 2022 due to the impact of the COVID-19 pandemic on crude oil prices. Higher fuel costs will potentially lead to manufacturers increasing their prices even further, making it unlikely that the pressures of inflation will ease in 2022.
Economic termsInflation is the economic process of a general increase in the prices of goods and services overtime. As prices rise, the amount of goods and services that can be bought with a unit of currency decreases, which may also be referred to as a decrease in a currency's purchasing power. A common measure of the rate of inflation is the rate of change in prices from one period to the next and are usually measured both monthly and annually. Annual inflation rates are those more keenly observed by a wider audience given that fluctuations in price can be temporary. That said, monthly inflation rates are followed closely by those hoping to assess the direction in which the price level is headed.
Inflation can be measured at different levels - in individual countries, regions, or globally. These different measures can tell us different information about the state of the world's economies. The inflation rate is usually the percentage change of the general price index - an average of relative price changes. However, prices do not always increase at the same rate and so the consumer price index (CPI) is meant to more accurately reflect the impact of inflation on the day-to-day life of consumers. Deflation is the opposite of inflation and refers to a general decrease in the prices of goods and services over time, which has the negative impact of decreasing consumer spending.
Healthy InflationInflation is not necessarily a negative process; in fact, most economist agree that the negative impacts of a small amount of inflation outweigh the risks of deflation. The necessity of some inflation has been attributed to the driving of consumption, keeping unemployment low, and encouraging investment, all of which play a role in increasing economic growth and GDP. What must be avoided are high levels of inflation or at the extreme, hyperinflation. Hyperinflation can render private savings utterly useless in a short space of time, creating social problems and uncertainty.
For example, a look at the inflation rate of Venezuela shows that the country experienced an inflation rate of over 65,000 percent. This has had a detrimental effect on the economy, with nearly 4.8 million Venezuelans fleeing the country in 2019 and further exacerbating political and social turmoil that caused hyperinflation in the first place.