The economy has been stagnant for some time now due to the COVID – 19 pandemic. When COVID – 19 set in during March of 2020, unemployment skyrocketed, prices for certain goods rose, and the economy was thrown into a whirlwind. With much effort over the past year to mitigate some of the issues that have resulted from COVID – 19, the economy is beginning to heat up again, and with that, comes an increase in inflation rates.
First and foremost in the discussion of inflation rates is the interjection of cash into the economy. Many governments around the world have injected funds into their economies, whether in the form of direct payments to eligible citizens, increased unemployment benefits, or even paying their residents to stay home in an effort to slow the spread of the COVID – 19 virus. With all this money in the hands of the public, it is only logical that people will begin to spend this money. When people spend this money on goods that are already priced higher (because of the price increases brought about by COVID – 19), sellers gain confirmation that their goods can sell for a higher price, and therefore they will continue to price those goods at a higher price. This impacts the Consumer Price Index, or CPI, which is a primary measure of inflation. The way that CPI is measured is by taking a basket of goods and then calculating the price of the basket in differing time periods. For example, if a basket of common goods (such as apples, gasoline, electronics, and so on) costs $15 in one year, and $20 in another year, then the inflation rate is said to be 33% (20 dollars minus 15 dollars divided by 15 dollars). Of importance to note is that this inflation rate is for example purposes only and this rate is highly unrealistic for a year over year increase.
Inflation is projected to be at 2.3% in 2021, up from 1.6% in the year 2020. This is logical since the economy was stagnant during 2020 but due to global efforts to propel the economy it is beginning to heat up in 2021.
What can be done about inflation? Central banks, if their goal is to stabilize inflation, can implement contractionary policies in the form of raising interest rates. However, in doing so, the banks are discouraging spending, which is exactly what many governments have been encouraging for the past year. Governments have been encouraging the economy to “heat up” and grow, and inflation is a natural result of this, so therefore it is unlikely that banks implement contractionary policies that reduce the amount of inflation present in the economy.