During the past year, it seems inflation has been the word and concept everyone has been talking about. We hear about it on the news, during elections, in conversation looking at high prices. Everything is costing more, and it doesn’t seem to be slowing down. With gas, groceries, restaurant bills, and such going up, where does this end? And why has inflation been going up now? Contrary to belief, there really isn’t one main reason, but understanding how inflation works will help to show what is going on.
In addition to all of the news about inflation, I was inspired to write this column by my dad’s constant talking about how items were much cheaper in the 1980s and 1990s. While I always thought this was a little funny and marveled at how little things cost years ago, taking economics classes in college helped me to understand what was really going on. While a gallon of gas may have cost an average of $1.12 in 1985 according to AARP, compared to more than $3.40 now in Minnesota from the American Automobile Association website, looking at prices in isolation like this can be deceiving.
While on the face of it gas going up three times in price looks incredible, when you look at the way everything has gone up in price in the economy, you can see how inflation works. Gas is much more expensive now, but so are wages. To keep using 1985 as an example, the federal minimum wage was $3.35 then. Now, the federal minimum wage is $7.25, but the minimum wage in Minnesota is even higher, at $10.59 for large employers and $8.69 for small employers.
As can be seen in job advertisements all around the Central Minnesota area though, most employers are hiring even first time workers at wages much higher than that. So based on these numbers, gas is actually less expensive than it was in the 1980s.
But why do these prices go up in the first place? Inflation happens when there is not enough to go around in the economy, whether that is goods, services or workers to hire. If 100 people want to buy a hat and there are only 80 in stock, the price will go up because the seller can sell the hats to the 80 people who are willing to pay more. This is called demand-pull inflation, too many dollars chasing too few goods.
This also explains why wages are going up so much right now. There are less people available to work than there are job openings and so employers end up competing by raising wages to attract those workers. There is also supply-push inflation, where businesses that are having to pay more for supplies and labor costs increase their prices. These kinds of inflation naturally occur in an economy, and is why the cost of pretty much everything gradually increases over time.
Now though, inflation is running much higher than usual. A healthy increase in inflation is about 1% to 2% per year in an economy like the United States. However in 2022 Forbes reported inflation had hit 7.5% overall by December. This explains why inflation which normally can happen in a less noticeable manner, has hit the headlines.
Explaining the cause of this extreme inflation is much tougher. The Russian invasion of Ukraine has pushed global gas and food prices higher because Russia is a major producer of oil and Ukraine is a major producer of grain. The COVID-19 pandemic shut down a lot of factories and businesses and the effects are still being felt in the supply chain worldwide. The pandemic also changed the workforce, as more people began working from home, or changed the jobs they were working in, leaving many industries short of workers. There really has been a perfect storm of events and factors that have made inflation more likely to happen.
Understanding inflation, what it is and why it is happening is important in our political debates and daily decision making. Looking back in history, though, can help us to compare inflation today with the past, and help us to tell the difference between gradual, natural inflation and the extremes we are seeing today. Knowing the causes of inflation also shows us how it is a much more complicated, global process that may not have an easy solution.
Connor Kockler is a graduate of St. John’s University. He enjoys writing, politics and news, among other interests.
