7 factors that cause inflation

Inflation is when the prices of goods and services rise in relation to the dollar or the currency in use. The result is that the dollar or unit of currency will buy less of just about everything than it previously did.

For people on fixed incomes or those who are in professions where wages don’t rise along with price increases, inflation can be painful. And if inflation becomes hyperinflation – when prices increase by 50% or more in a year – it can destabilize an economy.

The Economy Is Going Strong

When the economy is growing, more people have jobs, wages rise to hire and keep those workers, and more people have money to spend. As a result, they buy more necessities and some even splurge on new luxury items.

There is more currency available

Inflation can also occur when the Fed, or another central bank, adds fiat currency into circulation at a rate that exceeds that of the economy’s growth rate. That creates a situation in which there are more dollars bidding on fewer goods and services.

Basic materials increase in price

There were many reasons for this, but one major one was the OPEC oil embargoes. The embargoes led to a gas shortage, higher prices for home-heating oil, higher prices at the pump, and increase in the prices of manufacturing and shipping for nearly every single consumer good.

The housing market takes off

The housing market is a major part of the U.S. economy. And it has an outsized impact on the broader economy. When the housing market is strong and home prices are rising, then homeowners have more equity to call upon to make major purchases, which can goose inflation.

New regulations increase costs

Sometimes new tariffs can increase the costs of imported goods, which can lead to inflation. At the same time, new regulations that make a particular commodity or service more expensive or time-consuming to obtain can also increase the costs to consumers, leading to inflation.