How High Is Inflation and What Causes It? What to Know

The consumer-price index rose at an 8.3% annual rate in April, a slight easing from 8.5% in March, a four-decade high

The average price for a gallon of regular unleaded gas in the U.S. hit a new record high Tuesday.PHOTO:JOE BUGLEWICZ/BLOOMBERG NEWS

ByGabriel T. RubinFollow

andDavid HarrisonFollow

Updated May 11, 2022 11:34 am ET

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U.S. inflation remained close to a four-decade high in April, easing slightlyto an 8.3% annual rateafter hitting its highest rate in four decades in March. Consumers are seeing prices rise sharply fora variety of goods and servicesas strong demand collides with persistent supply shortages.

Inflation is one of the most vexing problems facing economists and government policy makers, and is a factorraising the risk of U.S. recession. The causes are myriad, and the tools usually deployedto tame price pressurescan, in some scenarios, push the economy into a recession.

Here's what to know:

What is inflation?

Inflation reflectsthe broad rise of pricesor the fall in the value of money. It generally results from too much demand chasing too few goods or limited services, leading to price increases. Inflated prices don't necessarily hurt the economy as a whole, and only those consumers making purchases experience the increase.

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For example, new and used auto prices have risen sharply because of vehicle shortages driven by a lack of componentssuch as semiconductors. The increase in auto prices doesn't necessarily affect you unless you want to buy a vehicle.

Higher prices in one sector also don't necessarily lead to general inflation across the economy. But price increases across a range of categories will weaken consumers' spending power.

What is causing inflation?

The current bout of inflation has several causes, many linked to the pandemic. For one, consumers have been flush with savings from government stimulus programs and depressed services spending as a result of restrictions on businesses, leading them to open the spigot for goods that are in scarce supply.

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Supply-chain disruptions have also persisted across the global economy, withRussia's invasion of Ukraineand the recentrise of Covid-19 cases in Chinaadding additional pressures. Energy prices,including gasoline, have gone up. Truck drivers, seaport slots and warehouse spaces are all in short supply, leading to costly delays and rising shipping rates for goods.

Fewer workers are in the labor market, encouraging those who are working to demand raises. And low interest rates from the Federal Reserve have made borrowing cheaper, making big purchases more attractive. The Fed is now moving rapidly to make borrowing more expensive, using the central bank'sprimary tool of raising rates. These factors and many others are driving up costs.

The added costs, at every step from production to sale, lead to price increases for consumers, with some companiesseizing on a rare opportunity to raise prices.

Are There Fewer Chips In Your Chip Bag? It Could Be Due to Shrinkflation.

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Consumers are growing savvy to shrinkflation, the practice of downsizing the contents of a product rather than raising prices. So companies are getting creative. WSJ's Annie Gasparro explains how to spot it in all its forms. Illustration: Adele Morgan

How is inflation measured?

There are different ways of measuring inflation, even among government agencies. The shorthand version comes from the Labor Department's consumer-price index, or CPI, which is calculated using a survey of households and only covers spending on goods and services. It excludes expenditures that aren't paid for directly, such as medical care paid for by a person's health insurance. Its limited set of expenditures can make CPI more volatile.

The personal-consumption-expenditures price index, or PCE, takes into account a broader range of expendituresand feedback from businessesto provide a more expansive picture of price changes. This inflation reading is the Federal Reserve's preferred measurement. The Commerce Department releases its PCE estimate monthly as part of its income and spending report.

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Just how fast are prices rising?

The CPI is up 8.3% from a year ago, according to theLabor Department's report for April. With food and energy removed from the pictureprices in those categories can be volatileCPI is up at a slightly lower rate of 6.2%. The readings, however, show that price increases are widespread and well above policy makers' targets for annual inflation, which hover around 2% on average.The Ukraine crisishas boosted oil prices, with U.S. gasoline costshitting a recordthis week, adding to already high inflation.

Used-car prices have jumped over much of the past year because new autos were in short supply.PHOTO:CHANDAN KHANNA/AGENCE FRANCE-PRESSE/GETTY IMAGES

What goods or services are driving the increase in prices?

Prices are going up throughout the economy, but not uniformly. Used-car prices rose 22.7% in April from a year earlier, but have declined for three straight months. Food prices were up 9.4%, the sharpest rise since 1981. Restaurant prices rose by the most since the early 1980s. Grocery prices increased 10.8%, as year-over-year meat and egg prices continued to climb at double-digit rates.

Wages are also rising, right? But are they rising enough to maintain people's purchasing power given the pace of inflation?

In this tight labor market, workers are getting raises. But in real-dollar terms, their money isn't going as far as it used to.Annual wage growthis running at its fastest pace in two decades, but inflation continues to outpace wages for most workers, eroding their spending power.

Another factor affecting inflation is expectations about rising prices. If businesses believe there arewidespread consumer expectationsthat prices are going up across the board, they may feel more inclined to raise their prices without fear that customers won't spend or decide to shop at a competitor. This can also lead employees toask for higher wagesfrom employers because their cost of living has gone up, which can lead to an inflationary cycle of wage-price increases.

We've heard a lot about how elevated inflation is supposed to be temporary. What do most economists think?

Most economists believe inflation should start easing this year, but remain elevated above prepandemic levels into 2023. As is often the case among economists, there is disagreement about the level where price increases will stabilize.

How does inflation affect mortgage rates?

Housing prices have risen during the pandemic because of a combination of low mortgage-interest rates, strong demand and supply crunches for building materials and construction workers. Butmortgage rates recently hittheir highest level since 2009, something that could eventually crimp housing demand.

https://www.wsj.com/articles/inflation-definition-cause-what-is-it-11644353564

Please summarize article for my notes about inflation.