Inflation: Should you worry?

Inflation means an increase in prices, and US prices have been climbing to record highs as the economy bursts back from a pandemic plunge and faces shocks from the war in Ukraine. What does history tell us about inflation? In recent years, inflation has remained at low levels even when the economy was doing well and unemployment was falling.

These days, “can you believe how much I just spent on…” is a normal conversation starter in many parts of the world. We’ve compiled a list to help you understand what’s happening and why.

• The why: Gas prices, not supply chains, are the main culprit in the US’s inflation uptick
• The pain points: Where Americans are seeing the biggest price increases
• The hidden cost: How companies are hiding inflation without charging you more
• The big question: Will high inflation lead to bigger pay increases?
• The other “-ation”: Why economists are talking about stagflation

Forecasters estimate that there’s a one in three chance the US economy will enter a recession this year. While inflation doesn’t directly cause a recession, rising prices beget other economic problems, and the moves policymakers make to cool inflation can cause an economic downturn.

Inflation isn’t only a US problem. It’s gone global. Here’s a breakdown of inflation rates in some of the G20 countries with the largest GDPs. (Data are for March unless otherwise indicated. Each country’s CPI is weighted differently, so these aren’t exact apples-to-apples comparisons.)

• US: 8.5%
• Germany: 7.6%
• Canada (Feb): 5.7%
• Saudi Arabia (Feb): 1.6%
• France: 5.1%
• South Korea: 4.1%

A rise in gasoline prices was behind half of the overall spike in consumer prices in March. US president Joe Biden is hoping his plan to release more oil from strategic reserves and lift a ban on 15% ethanol blend this summer will simmer prices. But it’s not just gas: people are paying much more for used cars, hotels, and airfare.

Kind of—let’s talk about “shrinkflation.” Retail prices increase with more expensive ingredients and higher transportation costs. When bottom lines are being pinched, companies have three basic options: raise the price directly, take a little bit out of the product, or reformulate the product with cheaper ingredients.

Companies may try to pass those higher prices onto the consumer, who may be price-sensitive but may not notice subtle changes in packaging, or read the fine print about the size or weight of the product.

Since the 1990s, central banks for the US, Canada, Sweden, Japan, the UK, and Europe have all set 2% as a target for inflation. At that particular sweet spot, there’s room to cut rates to stimulate growth while keeping prices and the economy steady.

But the unpredictable pandemic economy changed the US Federal Reserve’s approach: Rather than setting an annual inflation rate of 2% as a hard target, the Fed now looks at the average rate of inflation over a period of time. The labor market is the new key indicator for the health of the economy.

• The rise in lemon prices in India echoes onion inflation a decade ago
• LVMH is shrugging off record-high inflation and war
• Jamie Dimon wishes the Fed “all the best” on slowing inflation
• Will high inflation lead to bigger pay increases?
• How to beat inflation at the grocery store