money·3 min read

Inflation Explained: Why Prices Are Going Up

sad woman grocery shopping
Design: theSkimm | Photo: iStock
May 5, 2022

You might have noticed higher totals in your shopping cart recently.

What's going on with rising prices?

Inflation. That's the general increase in the cost of everyday items. Which leads to a gradual decrease in your money's purchasing power. Because a dollar doesn't stretch as far when things get more expensive.

Great. And inflation is happening because…

A few reasons:

Economic recovery.

When the economy starts to pick back up after a downturn (like after a global pandemic), prices tend to go up. Because people are more willing to spend when they have more money (hi, stimulus payments). And corporations raise prices when people are buying more.

Changes in weather.

A ton of commodities (aka raw materials) can be negatively impacted if the weather is too cold or dry. That can lead to shortages of goods like corn and wheat. And those added costs trickle down to consumers.

Supply chain disruptions.

Producing goods is a process. And if it breaks down anywhere along the line, it can impact how much of a product is available to the public. That can happen when there’s an internal interruption, like a shortage of workers. Or an external interruption, like a major storm that prevents a company from being able to distribute its goods.

War.

A major man-made global disruption. Since Russia’s invasion of Ukraine, gas prices have skyrocketed. And reduced grain and fertilizer availability (both countries are major producers) could further raise food prices in the US.

So what’s getting more expensive?

A LOT of stuff in just about every spending category. Especially ones that took a hit during the pandemic and are now bouncing back. Think: airfare, hotels, restaurants, and gas. But also products that have been in short supply, like semiconductor chips and everything that uses them (read: cars, smartphones, laptops), electricity, chicken, and oxygen (really). 

Is anything NOT getting more expensive?

Certain stock prices. One way inflation can affect the stock market: if the Fed thinks inflation is running too hot, it can raise interest rates to discourage consumer spending and keep prices under control. Reminder: higher interest rates means it's more expensive to borrow money and more attractive to keep your money sitting in a savings account.) 

Is there anything I can do about inflation?

Watch out for it. Inflation can show up in several (sometimes sneaky) ways. And protect your budget. A few ideas: 

Comparison-shop.

When prices start going up, it’s important to pay close attention to what you’re buying. If there’s a cheaper option, try swapping out your usual. Your budget says thanks.

Cut your spending.

If there are no easy swaps for the products you need, try looking for other ways to cut back so your budget isn’t stretched too thin. Look at all your regular monthly expenses to see what you can live without or downgrade.

Invest.

A well-diversified portfolio could help you earn enough to beat inflation. Just don’t make any sudden moves. Take this time to assess whether you’re comfy with your asset allocation for the long term. If not, it’s time to adjust your strategy to match your risk tolerance.

theSkimm

Prices are going up. And that means big things for your wallet. Understanding the potential impact can help you make smart money moves to deal with inflation.

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Skimm'd by Ivana Pino, Liz Knueven, Casey Bond, Stacy Rapacon, and Elyse Steinhaus
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