What is inflation? What to know about the economy as prices rise

Inflation is rising fast. 

On Thursday, the Labor Department said the Consumer Price Index (CPI) rose 5% annually in May, which was higher than the anticipated 4.7% increase, FOX Business reported.

The U.S. hasn’t seen that kind of an increase for about 13 years, since August 2008.

But what exactly is inflation and what does it mean for consumers?

S&P HITS RECORD EVEN AS INFLATION HEATS UP

Inflation is the term for when the prices of goods and services rise, according to SmartAsset.

That happens when the economy is growing strongly. As demand for goods and services increases, so do prices, SmartAsset reported. 

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However, as inflation increases, money’s purchasing power decreases, according to the financial website. 

“During a period of inflation, a dollar is worth less from one year to the next because it will purchase less,” SmartAsset reported. “Wages also tend to rise during inflation, however, so workers earn more. Borrowing tends to increase, since debts can be paid back in the future with dollars that are worth less.”

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According to The Washington Post, inflation in the U.S. typically stays below 2% annually. However, inflation is rising at a much higher rate now, in part because the economy is reopening as the country recovers from the coronavirus pandemic, The Post reported.

Price increases are also being caused by supply chain bottlenecks that happened during the pandemic, which is making it challenging for businesses to get the materials they need. Some businesses are also struggling to fill jobs because supplemental unemployment benefits have encouraged workers to stay home. 

CONSUMER PRICES SURGE 5% ANNUALLY, MOST SINCE AUGUST 2008

Federal Reserve Chairman Jerome Powell has said he expects upward pressure on prices to be temporary, as the economy adjusts to reopening.

However, if inflation does get too high, the Federal Reserve could have to raise interest rates to slow the economy, The Post reported. That could lead to another recession.

According to The Post, the current situation is “highly unusual,” but the economy isn’t in an “alarming” place yet.

FOX Business’ Jonathan Garber contributed to this report.

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