An inflation rate of 2 percent is what federal monetary experts aim for to encourage maximum employment and price stability.  This past summer, the U.S. inflation rate was more than quadruple that —  at 9.1 percent  Most economists expect it to fall steadily throughout 2023, and to reach about 3 percent by next fall. 

What causes inflation?

Competing factors in the global economy influence inflation, and not everyone agrees on which ones matter most.  But economists generally agree that it’s a function of supply and demand, and that there are two types of inflation:

• Demand-Pull Inflation occurs when there’s an increase in demand for goods and services but not a sufficient increase in supply. Businesses can’t increase their production quickly enough to meet the demand, and they raise prices. This kind of inflation often happens when unemployment rates are low and wages are high.  
• Cost-Push Inflation  occurs when there’s an increase in production costs for businesses. This may lead to decrease in total supply and a resulting increase in prices. This kind of inflation often occurs when the price of oil or other raw materials increase, making manufacturing operations more expensive. It can also be due to factors like natural disasters or major world events, such as the COVID-19 pandemic or the war in Ukraine, that disrupt supply chains and reduce the amount of goods available. 

What can the government, and you, do about inflation? 

The federal government has the most direct impact on inflation in the U.S. through its monetary policies.  Its primary lever to curb inflation is to raise interest rates.  When the Federal Reserve, America’s central banking system, increases interest rates (as it has six times this year), it makes it more expensive for consumers and businesses to borrow money. So people spend less, reducing demand. As demand drops, supply chains can catch up on production of goods and services, which in turn leads to a drop in prices. 

The Federal Reserve can also reduce the amount of money in circulation, which lowers inflation.

Congress and federal agencies can also reduce inflation by raising taxes and investing in infrastructure — roads, bridges, ports, railroads, energy grids — and workforce development to improve supply chains and skilled labor needed to increase production of goods and services.

As for state governments, they don’t control interest rates, but they can have some impact, positive and negative, on inflation through budgetary and policy moves. 

Cutting taxes and offering tax rebates and gas tax holidays, while popular with many state governors, won’t reduce and will likely exacerbate inflation, say some economists.  These tax breaks bring short-term relief, putting more money in the hands of consumers, which in turn increases spending, further reduces supply, and drives up inflation.

As with the federal government, states that invest in the supply chain side of things can help keep goods and services flowing.

For example, in Georgia, recent investments by both the state and federal governments in the recent $1 billion deepening of the Port of Savannah and improvements in shipping container capacity at the port are improving the supply chain bottlenecks there, allowing more ships, containers, trucks and goods to pass through the port into warehouses and onto trucks, helping them to arrive at their final destinations more quickly and efficiently.  In the long run, this increase in supply chain capacity reduces inflation.

Consumers can help themselves by taking a hard look at their monthly spending habits, says Tom Smith, professor of finance at Emory University’s Goizueta Business School. 

“I think most people don’t even know what they’re spending on each month,” he says. “Take a look at your cable or streaming subscriptions — how many do you really need? Are you still paying for a fitness club you never go to? Look at all the online content behind paywalls that you signed up for, like news sites that offered $1 introductory subscriptions that now cost $9 a month, and decide what you can do without.”   

Other money-saving moves Smith recommends are shopping at lower-cost grocery stores like Aldi and Lidl, making your own coffee and sandwiches instead of buying them retail, cutting off nice-to-have services like landscapers and house cleaners, and putting off any big purchases like cars, large appliances or homes while prices and interest rates are so high. And if you currently have credit card debt, pay down as much as you can as fast as you can, “because with interest rates going up,  that kind of debt just saps money away from you,” he says. 

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Header: More city dwellers are trying their hand at raising chickens. Adam Cabe of Dallas, GA enjoys maintaining his small backyard chicken coop to feed his family and friends. (Credit: Anna Reese)