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