I thought it might be a good time to do a thread on inflation. 1/x

Most people know that inflation relates to higher prices, but if the price of milk goes up, that is not, on its own, inflation. Prices of individual things go up and down all the time depending on factors specifically related to that good or service. 2/x

Inflation, instead, means your overall cost of living has increased. Or, put another way, it means that the money that you have buys less than it did. 3/x

The way that inflation is measured is complex. The government looks at a “basket” of things that consumers spend money on — rent, food, electronics, your phone plan. What’s included in that basket shifts over time because consumer habits shift over time. 4/x

This also means that you might experience more or less inflation than the official inflation numbers, depending on whether you spend more money on things that have gone up more in price. And, as you might guess, all measures of inflation are imperfect. 5/x

The Federal Reserve, which is in charge of ensuring “price stability” — that is, not too much inflation — has a lot of different ways of measuring inflation. But its goal is to have roughly 2% inflation each year. 6/x

Wait, why would they want any inflation at all? There are lots of answers to this, but one big reason is that the Fed fights inflation by raising interest rates, and higher rates can come with an economic price. 7/x

The thinking goes that the more vigilant the Fed is about not having any inflation at all, the more it chokes off economic activity, which can also mean fewer jobs and lower wages. 8/x

The Fed has decided recently that it’s been too paranoid about inflation and that it might be hurting lower-income & unemployed people by doing that, so it’s going to now let inflation run a little bit *above* 2%, so that the economy has more room to breathe. 9/x

This could also theoretically give wages more room to rise since wages (i.e. the price of labor, another type of inflation that people think less about) are also correlated with inflation, although ideally wages will rise faster than the rate of inflation. 10/x

A bit of inflation is also considered helpful by policymakers because if your money is always going to be worth less over time, you have less holding you back from spending it today. 11/x

But since the govt has been giving people a lot of spending $$, & the Fed has been stimulating the economy thru its own actions, some people worry it might be bad timing for this mindset shift from the Fed, that they might accidentally let too much inflation out of the box. 12/x

Meanwhile, we have all these unusual things happening because of the pandemic, like the types of supply chain problems I wrote about here, which might be temporary, or they could change the way people think about inflation. 13/x https://www.politico.com/news/2021/04/17/supply-chain-disruptions-482569

But inflation is weird, & nobody completely understands it. It’s partially psychological, since companies often won’t raise prices a lot unless they think those prices will be sustainable long-term. And that doesn’t mean they’ll feel comfortable *continually* raising prices. 14/x

Anyway, I don’t have any kind of neat takeaway about what might happen with inflation, but hopefully this will help you as you parse through debates about it. /END