Mortgage Rates Rise To Combat Inflation

There is no one single cause to the current struggles of inflation; rather, many factors contribute to the current situation. Many Americans may experience the day to day consequences of inflation, but few understand  what it is and how it comes to be.

What is inflation?

When the cost of goods and services rises over time, inflation happens. This might occur when there is a rise in the demand for products and services or a fall in the supply of those same goods and services. Inflation is the term used to describe the rate at which prices are generally rising and, as a result, losing some of their purchasing power. Inflation is brought on by a rise in the amount of money in circulation.

Additionally, when the government prints additional money, inflation may result. Some people, such as those who hold assets that appreciate in value when prices rise, may benefit from inflation. However, because their earnings do not rise at the same rate as prices, persons on fixed incomes like retirees can also suffer from inflation.

Inflation can also lead to economic instability, as people may start hoarding goods and services in anticipation of further price increases. The rate of inflation is usually measured by the Consumer Price Index (CPI). There are two main types of inflation:

Demand -Pull Inflation: This happens when the demand for goods and services outpaces the supply. This can happen when the economy is growing too quickly.

Cost -Push Inflation: This happens when the costs of production increase, leading to higher prices. This can happen when the cost of raw materials increases.

How do we combat inflation?

By raising interest rates, reducing the money supply, or boosting taxes, the government can fight inflation. Currently, the Federal Reserve boosts interest rates to combat inflation. In an effort to keep the economy from overheating, the Federal Reserve is also taking action. A too-rapidly expanding economy may lead to inflation as well as asset bubbles. An asset bubble occurs when the value of assets such as stocks and real estate rises significantly before falling. With higher interest rates, the Federal Reserve hopes to put an end to an asset bubble.