10 Commonly Asked Questions About Inflation

In March, American consumer prices rose 8.5% year over year, marking the sharpest increase in inflation since 1981.

The average national price for gasoline climbed to an all-time high of $4.33 per gallon, driven in part by the ban on Russian oil imports following the country’s invasion of Ukraine.

Grocery costs have risen as well. According to the Consumer Price Index:

• Meat, fish, poultry, and eggs increased 13% since February 2021.
• Fresh fruit prices rose more than 11%.
• Electricity costs increased 11%.
• Furniture and bedding prices climbed 16%.

With inflation becoming one of the biggest economic stories of 2022, many consumers are wondering what it actually means for their finances.

PennyWorks examined some of the most commonly asked questions about inflation and explains how it affects both the broader economy and your wallet. From the causes of inflation to its effects on purchasing power, borrowing, and investing, understanding these concepts can help you make better financial decisions.

1. What Causes Inflation?

Simply put, inflation is a decline in purchasing power over time.

Inflation can result from many different factors.

For example, in a strong economy, consumers have more money to spend, forcing businesses to raise prices to keep up with demand. Supply chain disruptions—such as those experienced during the global recovery from the COVID-19 pandemic—can also push prices higher by reducing the availability of goods.

Global conflicts can contribute as well. Russia’s invasion of Ukraine disrupted energy markets, contributing to higher oil and gasoline prices.

Inflation is rarely caused by a single factor, which is why economists often disagree about its primary drivers.

Some additional explanations for the recent rise in inflation include:

• Shifts in consumer spending
• Underinvestment in infrastructure
• Corporate pricing behavior
• Government stimulus programs
• Rising wages

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2. Why Has Inflation Been Relatively Low Since 1980?

During the early 1980s, unemployment exceeded 10%, and a severe recession helped bring inflation down from the historic highs of the 1970s.

Since then, inflation has generally remained stable and close to the Federal Reserve’s long-term target of 2% annually.

Beginning in the 1990s, however, the traditional relationship between low unemployment and high inflation became weaker.

Economists have proposed several explanations, including:

• More effective central bank monetary policy
• Declining labor union influence and slower wage growth
• Expansion of global supply chains
• Increased international trade

Together, these factors helped keep inflation relatively subdued for decades.

3. Will Prices Go Back Down?

Unfortunately, there is no quick fix for inflation.

The Federal Reserve has begun raising interest rates to make borrowing more expensive and reduce consumer spending. Supply chains have also gradually improved since the disruptions of late 2021.

However, many economists believe inflation may remain elevated for some time, citing continued increases in rents and housing prices.

Overall, many expected inflation to remain above the Federal Reserve’s 2% target for an extended period.

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4. Is Inflation Bad?

Higher prices are rarely popular with consumers, but inflation itself isn’t always considered harmful.

Extremely rapid inflation—known as hyperinflation—can destabilize economies, leading to:

• Hoarding of goods
• Loss of purchasing power
• Erosion of savings
• Broader economic instability

Moderate inflation, however, remains the subject of debate.

For example:

• Businesses may benefit by charging higher prices.
• Lenders generally lose purchasing power.
• People living on fixed incomes often struggle.
• Workers benefit only if wage growth keeps pace with inflation.

5. How Does Inflation Affect My Salary?

If prices rise while your paycheck stays the same, your purchasing power declines.

Between September 2020 and September 2021, the Consumer Price Index increased 5.4%, according to the Bureau of Labor Statistics.

Unless your salary increased by at least that amount, the real value of your income actually decreased.

Conversely, when inflation falls, each dollar buys more goods and services, increasing your purchasing power.

6. How Can I Protect My Savings?

Inflation reduces the value of cash over time.

A $10 bill simply buys less than it once did.

To preserve long-term purchasing power, financial professionals generally recommend maintaining a diversified investment portfolio designed to grow over time.

It’s also important to pay attention to interest rates.

As the Federal Reserve raises rates:

• Savings account yields typically increase.
• Mortgage rates often rise.
• Credit card interest rates usually increase.
• Variable-rate loan costs become more expensive.

For this reason, locking money into a low-rate fixed-term savings account may not always be the best option if interest rates are expected to continue rising.

7. Why Can’t the Government Just Print More Money?

At first glance, printing more money may seem like an easy solution.

In reality, increasing the money supply without increasing the supply of goods generally fuels even more inflation.

More money competing for the same amount of goods causes prices to rise further, reducing the purchasing power of each dollar.

It’s also worth noting that the U.S. government does not directly control the money supply.

That responsibility belongs to the Federal Reserve, which operates independently from the federal government in order to protect monetary policy from political pressure.

8. Which Industries Feel Inflation First?

Every inflation cycle is different.

Sometimes demand spikes suddenly—as happened with toilet paper during the early days of the COVID-19 pandemic.

Other times, supply shortages are the primary driver, such as the semiconductor shortage that contributed to higher automobile prices.

Industries that often experience inflation first include:

• Energy
• Utilities
• Real estate
• Consumer staples

9. Which Industries Take the Longest to Recover?

Retailers and other businesses that maintain large inventories often experience prolonged pressure during inflation.

As wholesale prices rise, retailers must replace inventory at higher costs, reducing profit margins.

Small businesses can face even greater challenges because suppliers often prioritize larger customers during periods of high demand.

Since smaller companies generally purchase lower volumes, they also have less negotiating leverage with suppliers.

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10. How Will Inflation Affect My Loans?

The answer depends on the type of loan you have.

Fixed-Rate Loans

If your loan has a fixed interest rate, inflation can actually work in your favor.

Because your interest rate remains unchanged, inflation reduces the real value of the money you repay over time.

However, this benefit only materializes if your income keeps pace with inflation.

Variable-Rate Loans

As the Federal Reserve raises interest rates to combat inflation, variable-rate loans generally become more expensive.

Monthly payments often increase on products such as:

• Credit cards
• Home equity lines of credit (HELOCs)
• Private student loans
• Some personal loans

Federal student loans, many auto loans, and many personal loans typically have fixed interest rates.

Mortgages may be either fixed-rate or adjustable-rate, so it’s important to verify which type you have.