As the effects of the COVID-19 pandemic begin to wane, prices are up, because supply and demand are in an historically out-of-whack phase. Correspondent David Pogue (with an assist from the David Pogue Thespian Ensemble) illustrates the economic pressures that are affecting the prices of everything from oil to consumer goods.

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Inflation: A Crash Course in the Economic Cycle

Inflation is a term that many of us hear frequently in the news or in discussions about the economy. But what exactly is inflation, and why is it such a crucial topic in economics? To understand inflation, we need to grasp the concept of the economic cycle.

The economic cycle is a pattern that the economy goes through, with alternating periods of expansion and contraction. These cycles impact various aspects of the economy, such as employment rates, consumer spending, and the overall price level of goods and services. Inflation is an important element within this cycle, as it refers to the general rise in prices over time.

So, why does inflation occur? There are several factors that contribute to inflation, but one of the primary reasons is the increase in the money supply. When there is an excessive amount of money circulating in the economy, individuals and businesses have more purchasing power, which allows them to bid up the prices of goods and services. This results in inflation.

Inflation can be categorized into several types, namely demand-pull inflation, cost-push inflation, and built-in inflation.

Demand-pull inflation occurs when the overall demand for goods and services exceeds the current supply. This situation leads to sellers increasing their prices, as they can take advantage of the high demand and limited availability of their products.

On the other hand, cost-push inflation occurs when the costs of production, including wages, raw materials, and transportation, rise. When producers face higher expenses, they are forced to increase their prices to maintain profit margins.

Lastly, we have built-in inflation, which is a result of anticipated future price increases. Built-in inflation occurs when workers and businesses incorporate expected price rises into their wage demands and pricing strategies. This type of inflation is often a self-fulfilling prophecy, as it perpetuates wage-price spirals.

Inflation affects individuals and businesses in various ways. For consumers, inflation erodes their purchasing power. As prices rise, the same amount of money can buy fewer goods and services, leading to a decrease in the standard of living. Savers and lenders are also affected by inflation, as the value of their fixed-income assets or investments decreases.

However, not all effects of inflation are negative. Moderate inflation can be indicative of a growing economy. When prices are rising, it suggests that consumer demand is robust, which can stimulate business investment and economic growth. Additionally, inflation can reduce the value of debt for borrowers, making it easier to repay loans.

Central banks play a crucial role in managing inflation. One of their primary mandates is to maintain price stability within the economy. To achieve this, central banks use various tools, such as adjusting interest rates, conducting open market operations, and implementing monetary policies to influence the money supply and control inflation.

In conclusion, inflation is an essential aspect of the economic cycle. It refers to the general increase in prices over time, which can have wide-ranging effects on individuals, businesses, and the overall economy. Understanding the factors that contribute to inflation and its various types can help us navigate the economic landscape and make informed decisions about savings, investments, and economic policies.