US inflation is currently at its highest rate in four decades, reaching 8.5% in March and coming down only to 8.3% in April. Consumers are seeing prices increase sharply for goods and services because strong demand is colliding with the supply shortages.

Economists think annual inflation has hit its peak and price increases going forward will be slower, or even come down. This seems confirmed by the recently released April consumer-price index.

Here’s what you need to know:

What is inflation?

Inflation reflects the rise or fall in the value of money. Inflation tends to results from too much demand chasing too few goods or limited services, which in turn leads to a price increase. Historically, inflated prices don’t hurt the economy as a whole. For example, new and used auto prices have risen due to the vehicle shortages driven by a lack of components. This increase doesn’t affect you unless you want to buy a new vehicle.

High prices in one sector don’t necessarily lead to inflation across the economy. But price increases will weaken a consumer’s spending power.

What is causing inflation?

The inflation we’re currently facing has several causes, many linked to the pandemic. Consumers have been flush with savings from government stimulus programs and depressed services spending as a result of the restrictions on businesses.

Supply chain disruptions have also persisted amongst the global economy, largely due to Russia’s invasion of Ukraine and the recent rise of Covid-19 cases in China. Energy prices have gone up. Truck drivers and warehouse spaces are all in short supply, leading to cost delays and higher shipping rates.

Fewer workers are un the labor market, which encourages those working to demand raises. Low interest rates from the federal reserve have made borrowing cheaper, encouraging big purchases. The Fed is now moving to make borrowing more expensive.

The added costs, at every step from production to sale, lead to price increases for consumers, with companies seizing on the rare opportunity to raise prices.

How is inflation measured?

The shorthand version comes from the Labor Department’s consumer-price index (CPI) which is calculated using a survey of households and only covers spending on goods and services. It excludes expenses that aren’t paid directly, such as medical care covered by a person’s health insurance.

The personal-consumption-expenditures (PCE) takes into account a broader range of expenses – and feedback from businesses. This inflation reading is the Federal Reserve’s preferred measurement.