Inflation has surged in recent months. In 2021, the US Consumer Price Index rose to 6.8%, its fastest rate since 1982.
High rates of inflation means that unless income increases at the same rate, people are generally worse off, meaning inflation can have a significant impact on small businesses,
To shed light on the reasons for rising inflation, Expensivity, an online money management resource, has compiled an infographic, which explores some of the reasons for the rising inflation and its effects.
Why is Inflation so High?
According to the infographic, increases in the price of goods or services can be caused by a surge in product demand, production cost increases, supply chain breakdowns, and changing house prices.
Expensivity explains how there are two major theories around rising inflation – cost-push inflation, where higher costs rise prices, and demand-pull inflation, where demand outpaces available products.
How is Inflation Measured?
The infographic provides invaluable insight into how inflation is measured. Inflation is measured by the Consumer Price Index (CPI). The CPI monitors a ‘basket of goods’, which include housing, food and beverage, clothing, education, medicine, recreation, transportation, and miscellaneous.
As Expensivity’s research alludes to, the federal reserve aims to keep inflation at 2% or less. In 2019, it stood at 2.3%, in 2020 it was 2020, and in 2021 inflation rocketed to 6.8%.
In 2021, prices were 15.53 times higher than average prices in 1921. Compared to 2020, US consumers paid 29.7% more for used cars, 8.3% more for food, 6% more for healthcare, 5.6% more for clothing, and 4.6% more for energy.
What To Expect from Ongoing Inflation?
The infographic also explores what we can expect from ongoing inflation, important information for small businesses to know.
Inflation can lead to higher wages. In 2021, the average hourly wages rose 5.1%. It can also lead to a lower unemployment rate. In November 2021, unemployment dropped to 4.2%. Inflation can create changes in investment preferences, lower savings rates, increased interest rates, higher costs of living, and cost-of-living adjustments, all of which small businesses should be aware of so they can adjust their prices and business model accordingly.
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