Alexander William SalterAIEREverything old is new again: Inflation plagues the U.S. economy. The Consumer Price Index is up 7.9% from a year ago. The Personal Consumptions Expenditures index is up 6.1% from a year ago. We haven’t seen price pressures like these in 40 years.If we want to understand inflation, we need a framework to organize our thoughts. Economies are fiendishly complex; without a model that helps us focus on the relevant details, we’re lost in the woods.Inflation means a general increase in prices. Equivalently, it means the dollar is losing purchasing power. Economists distinguish general price changes from relative price changes. The latter come from the forces of supply and demand operating in specific markets. The former are common to all markets.
