Understanding High Inflation: Causes & What to Expect

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Here's why consumer goods are so expensive.

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Key points

• In October, consumer prices rose 6.2% from the previous year.
• Low supply and high demand are contributing to higher costs.

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These days, many people are bemoaning the fact that life has gotten so gosh darn expensive. Gas costs more. Grocery prices are up. And forget those sweet holiday deals; this year, many people will be lucky to get their hands on the things they want, and they'll most likely pay a premium for them.

In October, the Consumer Price Index rose 6.2% on an annual basis (meaning, the cost of consumer goods was up 6.2% from a year prior). So what's causing such rampant inflation? There are a few factors that are coming together to create a scenario that's wreaking havoc on consumers' finances.

Low supply and high demand

If you ever took Economics 101, you may recall the relationship between supply and demand -- namely that when there's not enough supply of a given commodity to go around, demand increases, and so do prices. That's what's been happening in recent months.

During the pandemic, a number of key supply chains were disrupted or shut down. Now those supply chains are trying to ramp back up -- but that's not happening quickly enough.

Meanwhile, the economy has come a long way from where things stood a year ago. Currently, unemployment is lower and jobs are plentiful. Consumers have more money to spend -- and they're eager to spend it. But since there's not enough supply to keep up with consumer demand, prices have been rising.

The interesting thing about inflation is that it's easy to regard it as an indicator of a poor economy. But actually, inflation is often a sign of a healthy economy. If there were less demand for products, prices wouldn't be up so much. And so while most of us aren't going to go out and celebrate inflation, it's actually a sign that our full economic recovery may be closer.

How to combat inflation

Periods of inflation can be harmful to individual finances, and that's what may be happening right now. If you're having a hard time keeping up with rising living costs, there are a few steps you can take to make things easier.

First, get on a tight budget. Figure out exactly how much money you need to spend on essentials given today's higher costs, and only once you've accounted for those expenses should you allocate money to non-essentials, like entertainment.

Next, consider boosting your earnings with a side hustle. There are plenty of gigs that will allow you to pad your savings account and scrounge up more spending money.

Finally, be savvy about credit card usage. There are plenty of cards out there offering generous rewards and cash back for everyday purchases. Research your options and sign up for a card that will put more money in your pocket for essentials like gas and groceries.

Better yet, find a credit card with a sign-up bonus that has a spending threshold you're likely to qualify for. For example, if you qualify for an offer that will reward you with $200 in bonus cash for spending $1,500 within three months of opening your card, that's a deal worth chasing -- especially if you normally charge $500 worth of expenses or more on a credit card each month.

Unfortunately, high levels of inflation may be with us for quite some time. Do your best to maintain your buying power and steer clear of debt until things settle down.

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