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Inflation 101: Why is everything so expensive?

Inflation has hit a 40-year high in the U.S. and it's making life more costly. UW economics professor Thomas Gilbert explains the situation. #newdaynw

Have you noticed a price hike at your local grocery store or favorite coffee shop? Many people are cutting back on their spending thanks to the sharpest spike in inflation since 1981. 

There's been a whole lot of talk about inflation recently, but what is it and why is everything so expensive? University of Washington Associate Economics Professor Thomas Gilbert joined New Day to explain.

In short, inflation is simply an increase in the prices of goods and services. Professor Gilbert explained that there are three main drivers of inflation: supply, demand, and expectations. 

The COVID-19 pandemic is continuing to create issues in regards to supply, the ports are backed up, there are not enough truck drivers, etc. These supply issues have also been exacerbated by Russia's recent invasion of Ukraine. 

On the demand side, as people are doing things again and getting back to a regular routine, demand for goods and services is skyrocketing. Gilbert also noted that people saved more during the pandemic, so on average they have flushed bank accounts and more money to spend. 

Rising wages also contribute to heightened prices, as businesses are raising prices on consumers to maintain their margins. The lagging supply and increasing demand creates a sort of perfect storm for inflation. 

While it was great that the government was able to give monetary support to businesses and individuals during the pandemic, Gilbert said this is not a sustainable practice, as "printing more money" will only heighten the demand, creating more inflation.  

The question then remains — how can the government slow down or, better yet, reverse this vicious cycle of inflation?

Gilbert explained that the Federal Reserve, the main banking system in the United States, can't do much about the supply side of the coin, but it can affect demand by increasing interest rates. It is important that interest rates rise to slow down demand, but not too fast as that can cause economic collapse. 

One thing Gilbert recommended doing in times of inflation: keep saving. Don't think that just because prices are rising you need to quit saving to maintain your lifestyle. Gilbert said to keep saving as that money will compound in the years to come. 

Segment Producer Rebecca Perry. Watch New Day Northwest 11 AM weekdays on KING 5 and streaming live on KING5.com. Contact New Day.


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