So far, 2022 has brought the highest levels of inflation in decades. In April, the consumer price index (CPI) rose 8.3 percent from a year earlier and 0.3 percent from March.

Inflation has affected virtually all sectors of our economy. We've seen higher prices at the grocery store, in the housing market and for travel. If you can even find one, new cars' prices are going through the roof. The increase for Social Security benefits for 2022 reflected this with a cost-of-living  adjustment (COLA) of 5.9 percent, the biggest since 1982. The COLA for 2023 is projected to be even bigger.

Let's take a look at inflation in general—and at the 2022 version specifically.

What Are the Root Causes of Inflation?

At its core, inflation is about supply and demand. If there is high demand for a good or service and it's in short supply, then the price will invariably be driven higher. More specifically, there are three main drivers of inflation: 

• Cost-push inflation results from higher costs driving up prices. This might involve the cost of raw materials or wages. In our current environment, we've seen higher costs for both wages, due to shortages of workers in many industries, and many raw materials. An example is semiconductors, a key component for cars and a host of other products.
• Demand-pull inflation is the classic "too much money chasing too few goods" scenario. When there is demand in excess of supply, we get demand-pull inflation. We've certainly seen this type of inflation, due in large part to supply-chain issues that have dominated the news in recent months.  
• Fiscal and monetary policy can play a role as well. The low-interest-rate environment, combined with the liberal Federal Reserve policy toward its balance sheet that we saw for years, likely helped fuel demand and price inflation in the housing market and other areas over the past few years. 

How Does Inflation Affect the Economy?

Inflation can have both a positive and a negative impact on the economy.