Explaining inflation

HOWARD COUNTY - 

Inflation. 

Recession. 

Increasing interest rates. 

The world of finance is very confusing right now. It is also very volatile, with the Fed (Federal Reserve System) raising interest rates to try to curb inflation.

When asked to give some insight into what it all means, Mike Drees, President of CUSB Bank was quick to say he’s not an economic expert, but he was willing to explain part of it in easy to understand language.

“To over-simplify it, inflation is typically a supply and demand issue. When there is not enough supply of goods and services, then demand increases. When demand, or anticipated demand, increases for a product or service, then the price will typically increase. When money is easily available and cheap (low interest rates), then demand increases even more, and prices increase even more.”

That part is easy to understand. Locals have seen it happen. 

Last week, the gas prices around Howard County were just under $4.00 per gallon. A month ago, it was around $4.65 and a year ago, it was just over $3.00.

The same can be said for almost every other item consumers are purchasing, especially groceries.

To alleviate the higher prices, the Fed raises interest rates to discourage demand, which will eventually reduce prices.

Must read — Example

Drees gave an easy-to-understand example.

“If I’m selling candy bars for $1.00, and I run out every day because everybody who comes to my candy bar stand has $1.25 they are willing to spend. The cost of my candy bars might get raised to $1.50 to reduce that demand. 

“If interest rates are really low, my customers who only have $1.25 might get a loan to pay for that $1.50 candy bar. 

“Now the price of that candy bar that was $1.00 is now inflated to $1.50, and I have an extra 50¢ that I’m willing to overpay for things with. So it drives demand and prices for those things. 

“If interest rates increase a lot, my candy bar customers might not be willing to borrow to pay for my candy bars. All of sudden I can’t sell any candy bars for $1.50, so I lower my price back to $1.25 or $1.00. In turn, I have less money to overpay for things reducing the demand for them and potentially the price.”

After the fear of having the economy crash during the COVID pandemic, the Fed pushed interest rates as low as they could go. In addition, the government put out stimulus money for the same reason.

It worked. Consumers started spending money, causing supply chain issues. Now the Fed is trying to slow spending, to slow inflation, by raising interest rates.

It’s not fun to live through inflation, but this too shall pass.