What Causes Inflation, And How Can Consumers Deal With High Prices?

Inflation has slowed for the second month in a row after hitting a 40-year high of 9.1% earlier this year. This slowdown suggests the worst may be behind us, but high prices are still a problem for Americans across almost all industries.

For instance, the cost of gas fell 5%, but food costs rose 11.4% over the past year. The Federal Reserve enacted another 0.75% rate hike to combat inflation, but what is causing inflation, and how can the average consumer deal with high prices?

The 4 Causes of Inflation

Inflation describes the rising cost of goods and services over time, measured monthly by the Consumer Price Index. Inflation is always a concern for consumers and business owners. As goods and services become more expensive, the power of your money erodes away, which decreases your buying power, diminishes your emergency fund, and makes doing business much more difficult in many regards.

There are four primary causes of inflation:

• Demand-pull inflation: Demand-pull inflation happens when prices rise during a supply shortage. The recent increase in home prices is a good example of this—high demand and low supply created a surge in overall home costs.
• Cost-push inflation: Cost-push inflation happens when prices rise due to the increased cost of wages and materials. We saw this during the pandemic when supply chain shortages caused prices to rise.
• Built-in inflation: Built-in inflation happens when consumers demand higher wages to keep up with the cost of living. Businesses that have to pay higher salaries to their workers usually have to raise their prices to offset the higher wage expense, which furthers inflationary pressure.
• Increased money supply: An increase in money supply happens when the Federal Reserve begins printing more money. However, there is some debate over whether printing more money leads to rising inflation.

The ongoing inflation in the U.S. is primarily caused by supply chain disruptions, food shortages, and higher energy prices. Regardless of the origin, consumers need to re-evaluate their spending habits to deal with the rising costs we’re experiencing nationwide.

How to Deal With Rising Inflation

For most Americans, inflation has caused costs to go up in nearly every area of their budget. Recent signs indicate that inflation may have peaked, but there’s little evidence to suggest the FED has solved the underlying issues at the source of the situation.

Here are a few ways you can combat inflation in your own life:

• Reduce your expenses: The best way to offset rising costs is to look for ways to lower your expenses. Go through your budget and look for any areas you can cut back. For instance, you may be able to save money by cutting out unnecessary subscriptions or lowering your phone bill.
• Increase your income: You can only reduce your budget so far, so it’s also a good idea to look for ways to increase your income. You may be able to negotiate with your employer for a higher salary or take on a side hustle to bring in some extra cash.
• Continue investing: Finally, it’s critical to continue investing even as prices increase. Investing allows you to keep up with and even outpace inflation over the long run, and having a diverse portfolio will help you deal with financial ups and downs as they come.