Money feels fake lately. You go to the grocery store, pick up a carton of eggs and a bag of coffee, and suddenly you're out forty bucks. It’s exhausting. Everyone has a theory about what caused inflation in the US, and usually, those theories depend entirely on who they voted for in the last election. But if you actually look at the data from the Bureau of Labor Statistics (BLS) and the Federal Reserve, the reality is a messy, multi-headed hydra. It wasn't just one thing. It was a "perfect storm" of supply chain meltdowns, massive government spending, and a shift in how we all live our lives.
Inflation isn't just "prices going up." It’s the value of your dollar shrinking. When the Consumer Price Index (CPI) peaked at 9.1% in June 2022, it was the highest it had been since the early 1980s. People panicked.
The Pandemic Hangover and the Great Supply Chain Snap
Remember when you couldn't find a couch? Or a bicycle? Or a literal roll of toilet paper? That’s where this story starts. When the world shut down in 2020, factories stopped humming. Then, when things reopened, they didn't just "snap" back to normal. Global supply chains are like a massive, interconnected spiderweb. If you break one strand in a port in Shanghai, a car dealership in Ohio feels the vibration six months later.
Basically, we had a classic "too much money chasing too few goods" situation. Because people couldn't spend money on travel or dining out, they bought stuff. Electronics. Home office gear. Gym equipment. This surge in demand hit a brick wall of logistical nightmares. Ports were clogged. Semi-conductor chips—the tiny brains inside everything from your fridge to your Ford F-150—were nowhere to be found.
According to research from the Federal Reserve Bank of San Francisco, these supply-side disruptions accounted for about half of the run-up in inflation. You can't just print a new shipping container or manifest a thousand truck drivers out of thin air. It takes time. And while we waited, prices climbed.
Stimulus, Spending, and the Money Spigot
Now, we have to talk about the "demand side." This is where things get political, but the numbers don't lie. Between 2020 and 2021, the US government injected roughly $5 trillion into the economy through various relief packages. We're talking about the CARES Act and the American Rescue Plan.
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Was it necessary? Most economists, like Jerome Powell, argued at the time that the risk of "doing too little" was a total economic collapse. But doing "too much" has consequences.
- Direct stimulus checks put cash in pockets.
- Enhanced unemployment benefits kept spending power high.
- The Paycheck Protection Program (PPP) flooded the business sector with forgivable loans.
When you pump that much liquidity into a system where production is stalled, you're basically pouring gasoline on a fire. The M2 money supply—a measure of all the cash, checking deposits, and "near money" in the system—skyrocketed. Honestly, it would have been a miracle if we didn't see inflation after that.
Energy Shocks and the Ukraine Factor
Just as the world started to figure out how to ship boxes again, Russia invaded Ukraine in early 2022. This was a massive "black swan" event for global energy markets. Russia is a gargantuan exporter of oil and gas. When sanctions hit and supply lines were severed, the price of West Texas Intermediate (WTI) crude oil surged past $120 a barrel.
Gas prices at the pump hit a national average of over $5.00 a gallon in June 2022.
Why does this matter so much? Because everything you buy is moved by a truck, a ship, or a plane. When diesel prices go up, the cost of moving a head of lettuce from California to New York goes up. The grocer doesn't just eat that cost. They pass it to you. This is what economists call "cost-push inflation." It’s not that people wanted to spend more on gas; they had to, which then bled into the price of literally every physical good in the economy.
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The Labor Market Is Actually "Too Good"
This is the part that feels counterintuitive. Low unemployment is good, right? Usually, yes. But the post-pandemic labor market became "tight" to an extreme degree.
Businesses couldn't find workers. To lure people back, they had to raise wages. From 2021 to 2023, we saw some of the fastest wage growth in decades, particularly for low-income workers. But here’s the catch: the "Wage-Price Spiral."
If a fast-food joint raises its starting pay from $12 to $18 an hour, the price of a cheeseburger is going up. If everyone’s wages go up, everyone has more money to spend, which keeps demand high, which keeps prices high. It’s a feedback loop that’s incredibly hard to break without making the economy "cool down," which is exactly what the Fed has been trying to do by hiking interest rates.
Corporate Profits: Greedflation or Just Business?
There's a heated debate about "Greedflation." Some analysts, like those at the Economic Policy Institute, pointed out that corporate profit margins reached record highs during this inflationary period. The argument is that companies used the news of inflation as a "smokescreen" to hike prices even further than their costs required.
While it’s true that markups increased in certain sectors (like meatpacking and shipping), most mainstream economists argue this was a symptom of high demand rather than the primary cause. If people are willing to pay more, businesses will charge more. That’s just Capitalism 101.
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What Most People Get Wrong About the Fed
You've probably heard that the Federal Reserve "waited too long." In 2021, the word of the year was transitory. The Fed thought inflation would just go away once the ports reopened.
They were wrong.
By the time they started raising the federal funds rate in March 2022, the genie was already out of the bottle. Interest rates are a blunt instrument. By making it more expensive to buy a house or a car, the Fed intentionally slows down the economy. It’s a painful cure, but historically, it's the only one that works to kill high inflation.
The Housing Crisis Within a Crisis
We can't ignore shelter costs. Housing makes up about one-third of the CPI. Because of a decade of underbuilding following the 2008 crash, the US was already short millions of homes. When the pandemic hit, and everyone wanted a home office or to move out of crowded cities, prices exploded.
Higher interest rates were supposed to fix this, but they created a "lock-in" effect. People with 3% mortgages refuse to sell because they don't want a 7% mortgage. So, inventory stays low, prices stay high, and the "shelter" component of inflation remains the most stubborn piece of the puzzle to bring down.
Actionable Insights: How to Protect Your Wallet
Understanding what caused inflation in the US is great for trivia night, but it doesn't pay your bills. Since we are likely living in a "higher for longer" interest rate environment, your strategy needs to shift.
- Audit your recurring subscriptions. Inflation creeps into your bank account through "subscription rot." If you haven't used that streaming service or gym membership in 30 days, kill it.
- High-Yield Savings Accounts (HYSA) are a must. For the first time in fifteen years, you can actually earn 4-5% interest on your cash. If your money is sitting in a big-bank checking account earning 0.01%, you are effectively losing money every single day.
- Negotiate your fixed costs. Insurance premiums (auto and home) have skyrocketed lately because the cost of repairing cars and houses has gone up. Shop your rates every 12 months. Loyalty to an insurance company is a tax you shouldn't pay.
- Focus on "Real" Assets. If you're investing, look toward companies with "pricing power"—those that can raise prices without losing customers—or diversified index funds that capture the broader growth of the economy despite the noise.
Inflation is finally cooling, but "disinflation" (prices rising more slowly) isn't "deflation" (prices actually going down). The prices we see today are likely the new baseline. Adapting to this new reality means being more intentional with where your capital flows and acknowledging that the era of "free money" and 0% interest rates is officially in the rearview mirror.