Unit 2 · Level 1 · Inflation
Why prices rise
Prices rise for three big reasons. Demand-pull: too much spending chasing too few goods. Cost-push: inputs like energy or shipping get pricier and businesses pass it on. And the sneakiest of all, expectations: if everyone believes prices will rise, they raise wages and prices in advance, making it come true.
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What you get asked
Match the inflation engine to its story.
Real episodes usually mix all three. 2021-22 in Europe had stimulus-fuelled demand, an energy shock, AND drifting expectations.
Europe's 2022 energy price shock, passed on through everything from bread to bus tickets, is a classic case of…
When gas prices multiplied after Russia invaded Ukraine, production costs surged and got passed to consumers. Textbook cost-push.
When everyone expects inflation, workers demand raises and firms pre-raise prices: an expectations ___.
Expected inflation becomes actual inflation. That feedback loop is why central bankers obsess over 'anchoring expectations'.
Put the expectations spiral in motion.
This is the 1970s story: inflation expectations came unanchored and it took brutal rate hikes to break the loop.
Why do central banks fear the expectations spiral most of all?
A supply shock fades on its own; unanchored expectations don't. In the early 1980s the Fed pushed rates near 20% to break exactly this loop. 🐜
The rest of this unit
Why prices rise, who wins, who pays, and what happens when money dies.