News

Inflation rose 2.7 percent over the prior year in November, according to the latest government report on the consumer price index (CPI), yet many experts expect the Federal Reserve will cut interest rates when central bankers meet in December based on personal consumption expenditure data.

What do these stubborn levels of inflation mean for the average consumer? How should consumers navigate budgeting in the new year? And how might the policies of a new U.S. presidential administration impact inflation?

St. Olaf College Assistant Professor of Economics Marcus Bansah provides expertise and answers those questions:

What is inflation and what does it indicate about the health of an economy?
Bansah: Inflation is a persistent rise in the general price level. It is computed based on the consumer price index, which includes the prices of thousands of goods and services purchased by a typical household. Rising price levels are an indication of increased cost of living. It means households have to pay more for groceries, utilities, gas, rent, and other goods and services that make life worth living. A prolonged period of inflation is bad for the economy because it stretches the budgets of individuals, businesses, and governments — forcing them to cut back on spending on goods and services. It also triggers interest rate hikes, which may further exacerbate economic pain as people have to pay more when they borrow to buy a car or decide to get a mortgage.

What are the factors that can cause inflation to rise or lower?
Bansah: There are many factors that can cause inflation. These factors can be viewed from the demand side and the supply side. Demand-side factors, also known as “demand pull,” include anything that contributes to an increase in demand for goods and services beyond what businesses can supply. Some examples include easy money policies, which lead to too much money in the hands of people and overspending by the government. It is important to point out that these policies in themselves do not necessarily cause inflation. Inflation only becomes an issue when the demand pressures emanating from these policies outweigh the economy’s ability to meet those demands. On the flip side, anything that constrains the economy’s ability to supply goods and services may contribute to inflation. These factors, often referred to as “cost-push,” include rising cost of inputs emanating from factors such as an increase in wages or a rise in oil prices, among others. Supply-chain challenges that affect the ability of a business to produce goods and services may also contribute to inflation.

What type of consumers does inflation impact the most?
Bansah: Inflation affects everyone in the economy, but those who suffer most from its effects are low-income earners who are often on a tight budget. During periods of rising prices, money loses its value, making goods and services less affordable to consumers. While high-income earners may be in a position to increase their budgets to deal with rising costs, low-income earners may have to suffer spending cuts due to lack of sufficient funds. Unfortunately, this sometimes means cutting back on food expenses and other basic items that may be essential for healthy living.

How can consumers budget to prepare themselves for the impacts of a new economic agenda for 2025?
Bansah: With a new U.S. presidential administration coming into office with an economic agenda that may involve increased tariffs — which are taxes on imports — consumers would have to pay more for everyday items. People can prepare for the fallouts from the incoming economic agenda by putting funds aside to cover the rising cost of goods and services in the near future. This may mean spending only on items that they really need and cutting back on “wants” if need be. Alternatively, consumers can explore avenues for generating additional income to cushion themselves from the impacts of a new economic agenda for 2025.

How does your work at St. Olaf College support understanding how inflation impacts the everyday consumer?
Bansah: All three classes I teach at St. Olaf entail a discussion of the economic issues of the day. In my Intermediate Macroeconomic Theory class, students dissect current issues in the news such as inflation, gross domestic product (GDP), and unemployment within the framework of the different schools of thought in macroeconomics. The desire to give students the opportunity to delve deeper into these macroeconomic issues and learn how to formulate policy solutions to tackle them is the motivation behind my Contemporary Issues in Macroeconomics class. In this class, students read about current issues from the Wall Street Journal, engage in debates, and write policy papers. My International Economics class provides the platform for students to explore how developments in global markets –– such as oil price shocks, supply chain bottlenecks, and geopolitical tensions –– may play a role in fueling inflationary pressures in the U.S economy.

Bansah is an assistant professor of economics at St. Olaf College. His research focuses on analyzing policy-relevant development and trade issues at the macro level, particularly in small open economies. Bansah has published in The Journal of International Trade and Economic Development and Managerial and Decision Economics. He has presented his research at several conferences, including the annual meetings of the Southern Economic Association. Bansah has spoken to many media outlets on contemporary macroeconomics issues in the United States.