Originally written May 16th, 2022:
Inflation has always been present in the American economy. Only three years since the end of World War Two have seen negative price changes in the CPI (ie., negative inflation). Most central banks even have inflation targets, where they strive for inflation to exist at a certain level greater than zero. So why do we care about inflation, and when does it become a problem?
One answer (and there are many) is that it can make living unaffordable for the general population when it quickly outpaces wage growth. In this analysis, we illustrate U.S. private sector wage growth (in green) against CPI inflation (in blue). While price inflation has lingered just above zero since this wage data became available in 2012, the recent upward move has left wages well behind, at least for now.
Let us know what you think in the comments.