What is Inflation?
One of the oddest things about economic life is that the prices for things keeps rising? Incomes and prices in the past were amazingly different from what they are today [in] Pride and Prejudice, Mr. Darcy supposed to have [been] one of the richest people in britain It’s 1813 and his income is 10,000 pounds a year today That’s less [than] [half] of what a primary school teacher straight out of college would earn in sense and sensibility [there’s] an argument about whether an income of 20 pounds a week is enough to make you well-off and the answer is yes It’s there in living [memory] to a cinema ticket was 30 p in 1970 today It’s 13 pounds, so what does inflation happen and should we worry if it does? Government’s track inflation, obsessively and try to keep it low there’s a vast amount of [data] collected all the time to ensure [that] governments can say with amazing precision how the Inflation rate is going is it on track for two point three percent per annum [or] Might the increase of low point three eight percent in February be a cause for alarm This is in big historical terms a relatively new concern In the 17th century the Spanish Empire essentially collapsed from inflation without even realizing it was occurring So over time societies have become obsessed with measuring [inflation] and very focused on managing it So why is there inflation? What makes it happen there are basically three reasons? The first is what economists call cost-Push inflation This is where the costs to businesses rise and are then passed on [to] customers There can be a lot of reasons for these rises firstly raw materials Especially oil might get more expensive for a very nice reason because a lot of countries are developing and doing well secondly workers might be asking [for] more money and Succeeding either because they’ve organized themselves well politically or because schools and colleges haven’t been training enough workers in the skills that companies need Thirdly land rents might be increasing because not enough factories and offices have been built which tends to come down to political Failures around building permits the result of all this is that businesses then push their extra on to the consumer by raising prices They don’t want to it’s a scary move but they have no choice. They’d go out of business otherwise The second kind of inflation is called demand inflation This is when there are increases in the number of people who want something whose supply can’t keep up The most common cause of demand inflation is an otherwise rather nice thing that people are getting richer and have more money to spend That’s why government can cause inflation by lowering taxes everyone loves tax breaks because they raise disposable income But in the longer term raising demand can also cause price rises thereby negating some of the initial boost of the tax break similarly a fallen interest rates may cause short-term pleasure and long-term inflationary pressure if Interest rates on loans or mortgages fall we might be tempted to take out a loan [to] buy the new car We’ve always wanted but the car company sensing solid demand will soon enough Jack up the price if banks and governments inject more cash and credit into the economy people have more money to spend But if they’re all chasing the same number of goods as before [it] just means they can all offer more for the same This is what happened around housing in the uk particularly in London They were broadly the same number of houses there were 25 years ago, but they all costs an absurd amount more The third classic cause of inflation is government’s printing money There’s a deep logic behind this idea which can at [first] sound almost criminal Governments often want to stimulate the economy to create more jobs So they print more money this can be done literally by increasing the number of notes in circulation Or they can do it by increasing government Debt or by letting banks make bigger loans on the same security in all these cases the amount of money in circulation Increases, but there’s a big problem because after a while it means the worth of every note starts to fall because more notes are Chasing the same number [of] things to buy. There’s more money about but it doesn’t buy you more it just pushes up prices However, there is a possibility here spotted by the economists and [Philosopher] John Maynard Keynes It takes time for the value of money to fall so for a little while There can [be] more cash around and prices haven’t yet risen this is a window of opportunity [that] economies can with a lot of luck [cease] At such Goldilocks moments people can actually increase their consumption Firms can afford to hire more workers and buy new machinery and once they’ve done that production will increase There will be more stuff to buy before inflation is eaten up the [gain] So there’s a real expansion a bit of inflation can grow the economy That’s a big but contested idea The argument is that it doesn’t matter if prices are going up [ten] percent every year [if] wages are going up 15 percent So deliberate government-led inflation can be a mechanism for growing the [economy] But it’s a very risky move which is often backfired and been attacked by the great enemies of the Keynes ian’s economists people we now know as the Monetarists who believe that anything which increases inflation is always going to [be] an issue and must be avoided at all costs whatever the short-term So why is inflation such a problem the real problem? Is that not everything inflates at exactly the same rate if Everything went up by hundred percent a year and so did everyone’s income and it was all totally steady and predictable It would be weird But it wouldn’t actually do any harm the harm comes from the fact that not everything changes at the same rate in 1941 in Hungary inflation reached [150,000] percent each day a jelly bean that [cost] 10 p on Monday morning would therefore cost the equivalent of 150 pounds on Tuesday morning, and 225,000 pounds on Wednesday morning, that’s incredibly complicated But it’s a problem [only] [because] other things would not be increasing as fast If you kept your life savings under the mattress you’d be wiped out in a day [or] two The money that could have bought you a house on Monday would get you a jelly bean on Wednesday This is the Ultra Extreme case, but it illustrates a basic point Inflation is bad for savings There’s no point in putting money aside, and that’s a pity because saving money the attitude of saving up for things before you buy them Is an admirable? characteristic keeping inflation Low rewards prudence It helps long-term planning because you can know what your money will be worth in the future and this rewards taking care around costs Ultimately what inflation reflects is the instability of the world and of life itself? Prices rise because we can’t yet keep the complex system known as the economy under control There’s always something going wrong or growing or falling or failing somewhere Ideally would keep inflation under control with a more or less fixed amount of money chasing a more or less stable amount of Goods But in reality [low] inflation is extremely difficult to achieve because so many factors can derail it cost of Materials cost of [Labour] productivity Taxes falling or rising exchange rates again falling or rising a growing domestic economy a neighboring economy. That’s growing Falling interest rates the buying of government bonds or the printing of money in the end we may have to accept that? Inflation is a bit like the weather or our own moods something that’s inherently rather unstable something whose ups and downs We must endure even as we try to mitigate the extremes learning to live with inflation belongs to wisdom