Inflation is hovering near a 40-year high, driven by steep increases in food prices, housing and utilities.
The Federal Reserve is trying to bring it down by aggressively raising interest rates, even if it pushes the economy closer to a recession.
Still, prices are soaring, making it harder for many Americans to get by.
The Consumer Price Index, or CPI report, is due Tuesday and will provide key information on the prices of various consumer goods and services and how much they have risen over the past month and year. The data will give an idea of whether inflation is beginning to cool.
While it is easy to see and measure those price changes, it is something else to actually understand them.
Inflation can impact many things besides costs, such as employment and wages.
So, what is inflation, and what causes it?
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What is inflation?
Inflation is a "generalized rise in prices," said Josh Bivens, the director of research at the Economic Policy Institute, a left-leaning think tank based in Washington D.C. For example, goods like gas, rent or food can be impacted by inflation.
"Inflation, though, really is meant to only refer to all goods and services, together, rising in price by some common amount," he explained.
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What causes inflation?
Inflation can be caused by several factors. The most common is "a macroeconomic excess of spending over the economy's relative ability to produce goods and services," Bivens said.
In this instance, more people are spending money on goods or services that are not readily available to meet those demands, so producers begin to raise prices.
"If everyone in the economy, tomorrow, decided they weren't going to save any money from their paychecks, and they're just going to spend every last dollar out of the blue, they would all run to the stores and try to buy things," Bivens said. "But, producers haven't produced enough to accommodate that big surge of across-the-board spending. So, you would see prices bid up."
Another cause of inflation is a lack of producers. If there are not enough workers to produce the demanded good or service, this would lead to an increase in prices as well, Bivens said.
"Labor is the primary component of cost of producing anything," he explained.
There is also a level of "built-in inflation" within economies, where systems try to get inflation to revolve around a steady percent.
In the U.S., the Federal Reserve System's target inflation is 2%. This means businesses can increase prices by 2% each year, and the market will still be competitive. Workers can also ask for a 2% wage raise based on these increases, so they can still afford goods and services.
"That 2% is kind of the built-in inflation; what everyone expects to happen," Bivens said.
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Is inflation good or bad?
Inflation is both good and bad, Bivens said.
"The inflation we have today (in 2022) is just bad. It's too high. It's too fast," he said. However if rates of inflation are consistent, positive and low, they can be beneficial, he added.
"Inflation is sort of greasing the wheels of the labor market," Bivens said. "It is a way to do some adjustments without actually having to cut nominal wages, and the economy just seems to operate better like that."
If inflation goes beyond its target percentage, though, it can cause uncertainty within the market.
"Whatever your target is, you don't want to go really far above that. You want people to be able to make plans and have a predictable sense of how much prices and wages will rise over the next year," Bivens said.
Who is hurt by inflation?
Whoever is spending most on goods or services can be negatively impacted by inflation.
For instance, when gas or food prices are inflated, low- and moderate-income families are hurt since they spend a higher share of total income on energy and food, said Bivens.
Will inflation cause a recession?
Inflation and recession are strongly related, said Bivens.
"A big rise in the unemployment rate is going to put a lot of downward pressure on inflation," he said. "As the economy slows, inflationary pressures tend to relent."
A recession isn’t determined by a negative quarter of gross domestic product or even two for that matter. Rather, it’s a significant decline in economic activity resulting from several factors, including high unemployment, a slowdown of goods produced and sold, and wages falling in addition to negative GDP readings.
That’s according to the National Bureau of Economic Research, which gives the official ruling on when a U.S. recession starts and ends.
So, inflation could produce a recession, but it is not a definite outcome.
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How is inflation is changing holiday deals and shopping?
According to the National Retail Federation, the largest retail trade group, holiday sales growth will slow down to around of 6% to 8% this year, in comparison the 13.5% growth of a year ago.
However, the average discount rate in the U.S. across all categories online went up to 31% on Thanksgiving, above last year's 27%, according to Salesforce data.
Additionally, shoppers spent $5.3 billion online on Thanksgiving Day, up 2.9% from the holiday last year, according to Adobe Analytics, which monitors spending across websites.
Despite this, Adobe Analytics expects online sales to be 2.5% from Nov. 1 through Dec. 31, a slowdown from last year's 8.6% pace.
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Why are people taking side hustles?
With inflation surging, more Americans are or are considering taking on extra work to afford holiday purchases along with everyday necessities.
More than four out of five Americans who currently have or plan to take on a side gig, seasonal job, or extra hours at work say inflation played a role in their decision, according to a Neighbor.com survey of 1,000 people taken on Oct. 30.
Additionally, 44% of Americans currently work or plan to work a seasonal job, like shipping packages for Amazon or stocking and unloading for Walmart. And 51% either currently work or plan to work overtime at their current 9-5 job, the survey said.
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Are food prices going to keep going up?
Grocery prices rose by 0.7% from August and are up 13% over the past 12 months. Barclays expects double-digital annual food inflation through January.
In September, the price of rice rose 1% from the previous month and 13.6% from a year earlier. Cakes, cupcakes and cookies jumped 1.8% and are up 16% annually. Pork climbed 1.8% and 6.7% from a year ago.
However, some food prices dipped. Uncooked ground beef fell 2%, and eggs fell 3.5%, though they are still up 30.5% yearly.
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Are imported coffee prices rising?
Over the last two years, coffee prices have steadily increased. According to Nasdaq, the price of coffee reached a high of around $2.50 per pound in February 2022. The last-recorded high price was in October 2014 at approximately $2.21 per pound.
Weather conditions have impacted the production of coffee, especially in Colombia where heavy rains caused complications for crop growth. From February 2021 to January 2022, coffee production in Colombia fell by 11%. In August 2022, Arabica coffee was being traded at a price of $2.43 per pound.
Even in American grocery stores, coffee prices jumped 14.8% throughout 2022, according to data from the Bureau of Labor Statistics. However, since then, the market value of coffee has fallen.
As of February, the price of coffee hovers around $1.80 per pound.
How inflation affects rent
Much like other aspects of the economy, inflation can cause a raise in prices for rent as well. Rent has gone up 0.8% monthly and 7.2% over the past year as landlords responded to an earlier rise in home prices.
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Why are gas prices going back up?
For a third month, gas prices have declined sharply based on falling global demand for oil and recession worries. Pump prices fell 4.9% but were still up 18.2% annually and have moved higher in recent weeks after OPEC announced oil production cuts.
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Where is the housing market heading?
According to Mortgage News Daily, the 30-year fixed mortgage rate on Oct. 24 was 7.29%, marking the highest 30-year rate in 20 years.
Meanwhile, in September, the median sales price for homes in the U.S. was $384,800, an 8.4% spike from the $355,100 price tag last year as prices climbed across the country.
Federal Reserve Chair Jerome Powell said the housing market might need "a correction" to make homes more affordable.
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What is core CPI?
The consumer price index, or CPI, measures the average change over time in the prices paid by consumers for a variety of different consumer goods and services, according to the U.S. Bureau of Labor Statistics. Core prices exclude volatile food and energy items and generally provide a better measure of longer-term trends.
These core prices increased 0.6% from August following a similar rise the previous month, pushing the annual increase from 6.3% to 6.6%, a new 40-year high.