Last week we found out that the U.S. consumer price index (CPI) in the month of April this year had its highest monthly jump in more than a decade. Confused? Don’t worry, we’ll explain everything in this example of what happens when you print more money.
Let’s start off with two important definitions:
What is inflation?
It’s the rise in price over time, but a decrease in the purchasing power of the consumer (you and me). The price of items is going up, but the money in the hands of the consumer is not, or not at the same rate as inflation. If you’re new to the concept of inflation, stop reading here, go to our Insta to read about the basics, then resume reading this piece.
What is CPI?
Consumer price index = a measure of price change. It measures the change in price that consumers pay for a basket of consumer goods and services. What on earth is a basket you ask? A basket is a fixed set of goods and services like basic food and beverages, housing costs, bedroom furniture, apparel, transportation expenses, medical care costs, recreational expenses, toys, the cost of admissions to museums also qualify, plus more. The prices of those are monitored usually annually and monthly to track CPI, to then track inflation.
In summary: CPI calculates how the consumer price of items is tracking — if it’s going up or down. CPI is usually measured both yearly and monthly. Now let’s take our real-life example of what is currently happening in the U.S.
Yearly — CPI measured that between April 2020 and April 2021, a basket of goods and services prices in the U.S. rose 4.2%. The expected increase was supposed to be 3.6%
Monthly — CPI measured that in the month of April in 2021, there was a 0.8% rise in a basket of goods, which was well above the expected increase of 0.2%.
What does CPI have to do with inflation?
CPI tells us that inflation is occurring.
The U.S. has printed more money than usual to pay for the stimulus and consequences of the pandemic. By printing more money, we mean that 25.4% of the money in supply in the U.S. was printed in 2020. That is A LOT. With more money circulating, it’s overtime risen (inflated) the price of consumer goods (stuff). How did we find that out? Through CPI and its calculation.
Printing more money leads to an increase in the money supply, which means people have more money to spend. This stimulates demand in the economy and if the economy can’t increase supply, this will lead to an increase in prices to keep up with demand. That right there is what we mean by inflation.
In conclusion: Printing more money is likely to lead to inflation, and CPI tells us when that’s happening. In our real-life example, when the U.S. printed more money for the pandemic, CPI was telling us that the price of goods and services was going up at a concerning rate.
Why do I care?
Simply put: things will cost more money, the supply of goods and services won’t match the rise in demand — and goods and services could become too expensive.