On a cool October afternoon in 1974, President Gerald Ford stood before a joint session of Congress and announced America had a new “public enemy No. 1”: inflation.
That month, the consumer price index — which tracks the prices of food, energy and other commodities — rose 12.3%, the biggest increase in nearly four decades. Americans concurred: 80% fretted about the economy being the country’s greatest problem, according to a Gallup poll.
Ford asked Americans to write a list of 10 ways to spend less and share it with their neighbors. The response to the initiative — part of a plan optimistically called “Whip Inflation Now” (WIN) — was initially positive, but enthusiasm quickly deflated and Ford ended up receiving a whipping in the next presidential election.
Nearly four decades later, America is in a similar situation. On July 13, the Bureau of Labor Statistics announced the CPI rose 9.1% over the past year, the sharpest increase since 1981. The cost of gas ballooned by a whopping 60%. Harkening Ford’s words, President Joe Biden declared that “inflation is our most pressing economic challenge”. When politicians make such statements, they often assume people understand what they mean. But what is the actual meaning of inflation?
What is the definition of inflation?
Inflation originally was about the relationship between paper currency and metallic money. In an article on the etymology of inflation, Michael Bryan, a former economist at the Federal Reserve Bank of Cleveland, wrote that it described “a change in the proportion of currency in circulation relative to the amount of precious metal that constituted a nation’s money.” A dollar bill does not have inherent value; its value is representative of money, initially in the form of precious metals, though now it is backed by bonds and other government-held collateral.
What causes inflation?
This definition changed in the early 20th century when inflation became associated with prices of goods and services. The value of a dollar was no longer determined by money —whether gold, bonds or other government securities — but by its purchasing power. In layman’s terms, it means your dollars are worth less than yesterday because they can buy less. (Ever heard a boomer wistfully talking about the good old days when you could buy a bottle of Coke for a nickel?)
Because prices fluctuate, economists have developed indexes like the CPI to calculate the cost of living and track changes — what we now call inflation. Economic policies, such as federal interest rates, try to rein in rampant inflation by discouraging consumer spending and curb rising housing prices. However, foreign exchange rates, interruptions to global supply chains, natural disasters and wars can have a domino effect on prices. For example, Russia’s invasion of Ukraine disrupted global energy markets, causing oil and gas prices to soar.
Inflation is truly a fickle friend — even fear of it can cause a self-destructive spiral of rising wages and prices.
How do you fight inflation?
Governments try to mitigate inflation in several ways. If prices are increasing because of high demand but low supplies, the Federal Reserve can raise interest rates to discourage consumer spending, affording overloaded supply chains a reprieve. But overdoing it risks a recession. Similarly, overstimulating a slow economy by injecting large stimulus packages may leave companies unable to meet demand. This is why some critics have argued that the combined $5 trillion stimulus packages for COVID-19 may have helped clog supply chains and drive inflation up.
Today, there are over a dozen types of inflation with different growth rates and assets that they affect. Stagflation — no relation to deer — happens when prices continue to stubbornly rise despite an economic slump. Most recently, unscrupulous marketers have subtly chipped off the volume of products — say, by reducing a bag of Doritos by half an ounce — while keeping the price the same, which is called “shrinkflation.”