With the pandemic dominating the news for the past two years, many seemed to be oblivious to the threat of inflation. Now, with rates of inflation at an all time high across the world (currently 9.1% in the US) , many countries such as the US are labelling inflation their top priority.

What is inflation and how is it measured?

Described as the ‘general increase in prices and fall in the purchasing value of money’ by the Oxford Dictionary, maintaining a stable inflation rate is often a macroeconomic objective for many economies across the world. The most commonly used measure of inflation is the Consumer Price Index (CPI), which measures the percentage change in price of a basket of goods. The basket of goods is compiled each month using roughly 80,000 items chosen by the results of the Consumer Expenditure Survey, which help determine not only the items within the basket, but also their relative weight. The use of CPI as the main measure of inflation is not specific to the US, with countries all around the world using CPI, hence also allowing for comparisons of the health of different economies.

Despite the common consensus remaining that CPI is the most valid measure, it is not exempt from criticism. Many economists argue that CPI figures are not entirely accurate, therefore resulting in the current inflation crisis to be understated. Over the years, the measure has evolved with the new methodology now taking into account the changes in the quality of goods and services, and the US congress sharing their view that the measure should reflect the changes in the costs of living.

What has caused the current inflation?

It’s not a surprise that high levels of inflation within economies have been contributed to by the lasting effects of the pandemic, with many not being able to obtain materials needed to meet sudden levels of demand due to broken supply chains. Thus explaining that due to COVID alone, consumer prices had reached record heights across the globe; suggesting it to be the largest contributor to the current economic climate.

However, there are other factors that have also enhanced inflation rates within the past year, such as the Russia- Ukraine war. This is as for the global economy, both countries are vital suppliers of raw materials such as energy and agricultural products (e.g wheat), and therefore meaning that any disruptions in supply chains have the ability to be detrimental. For example, due to many countries’ reliance on Russia for oil, prices went above $100 a barrel following the initial February attacks- showing just how volatile the market is.

Why is inflation an issue?

Inflation’s primary and possibly most dangerous effect is the erosion of purchasing power. This occurs as an overall rise of prices, will result in the same amount of money affording progressively less consumption. With many still combating the economic effects of the COVID crisis, higher food, gas and house prices places a critical financial strain on much of the population around the world. According to the USDA, all food prices are now predicted to increase between 7.5% and 8.5%; has the potential to be threatening, with 66% of those within the US claiming that inflation has outpaced any paycheck rises. Such figures are increasingly dangerous with over 37 million people in the US already in poverty, and the number is set to increase by over 10%. Whilst the US operates on the SNAP scheme to aid those who are unable to afford the cost of food essentials, many now argue that with inflation and an increased uptake of the scheme, the benefits given are no longer enough to afford healthy eating habits for families in need, and are therefore contributing to the increased levels of economic inequality within the country. Biden addressed increasing food and gas prices on the Jimmy Kimmel show, calling inflation ‘the bane of our existence’ and assuring the country that it is his ‘top domestic priority’.

Rising inflation of 9.1% in the US and 9.4% in the UK are serious concerns right now, due to their implications not only limited to increasing the cost of living. Many economists are worried about the long term effects of the current inflation rates, with some suggesting that it could lead to an inflationary spiral, similar to that in the 1970’s. It can also be argued that the current instability of the US economy is also likely to result in lower animal spirits (the willingness of investors to invest) in the long run; damaging especially when the economy is attempting to recover the investments lost during the pandemic. A lack of confidence may not only be affecting investors, with the New York Times reporting that 9/10 Americans are worried about inflation, and therefore are also likely to be increasingly cautious with their spending habits in the long term.

On the other hand, some are also beginning to point out that the current crisis might result in opportunities for positive environmental changes. This has been seen as after the G7 committed to ban Russian oil imports, many other environmentally-friendly parties began to weigh in on possible alternatives. The European Biogas Association suggested that scaling up the production of bio-methane could replace a ⅕ of the fossil fuel imported from Russia within a year. Thus showing that plausible solutions do exist, especially those which would ultimately benefit our planet. However, decisions to benefit from these opportunities are in the hands of our world leaders; with recent decisions such as Europe’s planned increased coal use currently not showing much promise.