Explained | What triggered the U.S. inflation?

Inflation in the United States hit a 40-year high in January and the consumer price index in January was 7.5% higher than it was a year earlier

The story so far: The U.S. Bureau of Labor Statistics reported last week that inflation in the United States hit a 40-year high in January. The consumer price index (CPI) in January was 7.5% higher than it was a year earlier. The prices of goods and services as measured by the CPI have been rising at a faster pace since April last year when the CPI rose by 4.2%. The US Federal Reserve has long tried to keep inflation at 2%.

Prices of goods and services in any economy are determined by demand and supply. When there is excess demand in the form of too much money chasing a limited supply of goods, prices rise to prevent shortages. On the other hand, when the supply of goods in the economy increases at a faster pace than the money supply, prices fall to prevent surpluses. American economist Irving Fisher’s ‘quantity theory of money’ is often used to explain how money supply affects the general price level in the economy. In short, prices in an economy can rise when there is a flood of fresh money entering the system, a drop in the amount of goods available for sale in the economy, or a combination of both.