Inflation: A Troublesome Economic Phenomenon

What are the costs of inflation for students?

By Michael Levitas

Photo Credit: usnews.com

Inflation is a well-known and troublesome economic phenomenon that has risen to its highest peak since the 1980s, not only in the USA but across the world. 

In January alone, inflation rose by 0.6%, which has become a burden for people as they witness their cost-of-living increase twofold. However, for businesses, it has been a blessing as they raise prices and reap profits. 

There is a barrage of misinformation about inflation that contains a kernel of truth but gives an incomplete understanding. It is essential to explain inflation and its costs.

In ECO 101, individuals are given models to explain economic concepts, and we define inflation as a rise in the price level of goods and services. Demand outstrips the supply of services, and prices start to rise. 

Consumers lose purchasing power, and they buy fewer things. Commentators in the media say that this is a basic supply and demand issue and that the economy is trying to reach equilibrium. 

However, these models in ECO 101 are simplified representations, and reality does not correspond to them 100%. As a result, we have to think deeper.

Inflation has spiked because of external and internal factors that we should hold accountable. 

The fragility of our supply chain and the quarantining of workers during the pandemic have led to numerous shortages of goods and services. This is not an accident; companies created this fragility through outsourcing production. 

A global supply chain is created where just-in-time production is prioritized. Just-in-time production means that goods are created to meet demand, not in surplus or in advance of need. 

In certain industries, we see a greater concentration of power, allowing them to keep prices high and rule out increasing production. 

The oil and gas industry has seen large benefits from prices remaining high and fear another decade of low prices. As a result, they forgo investments in technology and machinery to keep supply lower than demand.  

Other critics of inflation have invoked ideas from economist Milton Friedman, who stated that inflation is the result of increases in the money supply. 

While loose monetary policy can contribute to inflation, tightening the money supply and raising interest rates can slow the economy, increase unemployment, and raise borrowing costs. This would inflict more harm upon students, who could lose their jobs and see their debt burdens increase.

The decline in purchasing power is detrimental to college students, whose tight budgets will deal with the rising costs of housing, food, and tuition. 

During the 2022–2023 academic year, college administrations have cited inflation as a reason to hike the price of tuition. Students have to figure out how to balance these increases with daily essentials like groceries. 

At CSI right now, we’re seeing tuition hikes and higher prices that are draining everyone’s money. 

According to the St. Louis FED, there is an upside to inflation; depreciated money makes it cheaper for students to pay back their loans. However, students with adjustable-rate private loans that fluctuate based on the economy will have a harder time paying back their loans. 

New students can also see their borrowing costs increase due to lenders’ higher interest rates.

Simplified models cannot fully explain overall inflation, a complex economic issue. We must consider the external and internal factors that contribute to inflation and its costs for different groups, including college students. 

It is essential to have a comprehensive understanding of inflation in order to make informed decisions and develop policies to mitigate its negative effects. It is ineffective to blame the individual for their consumption habits. 

This doesn’t mean people shouldn’t make smarter choices, but we are ultimately dealing with a large systemic problem and therefore should avoid harmful policies such as higher interest rates.

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