Topic: What is Inflation? A Crash-Explanation (Read 437 times)

very short

inflation.. you buy less goods for unit of money
deflation.. you buy more goods for unit of money

however

valuing the unit of money becomes complicated
as does comparing this to the value of goods

but lets just use the minimum wage vs cost of living
(the value of money us normal people (majority) understand)

US has over the last decade injected alot of money into US economy.
(2012: 16trill -> 2022:  23trill) (+43%)

but. this money is not all in citizens pockets to spend
the citizen/businesses pockets/accounts amount was
(2012: 2.5trill -> 2022:  6trill) (+140%)

where just individual peoples personal bank accounts s less than this.

citizens have seen over double the amount of cash circulating at ~14%/year. but their incomes have only increased by 3.3%/year average

the reaction to this is that the price of goods then increase based on the bigger numbers of circulating money and big money of whole economy.
whilst the income of people is not such a large leap

believing in, following, trusting, having meaning in "inflation".. is tough to measure by a individual to compare to their income..

for instance..
house prices of 2012 178k -> 2022: 380k (+117%)
loaf of bread of 2012 1.41-> 2022: 1.82k (+29%)

which depending on what "basket" of costs of living goods is included can affect what rate is ultimately used.
government have a basket which they have used for decades. but this basket is not good representation of peoples spending habits.
for instance computer, devices and internet costs like ISP/netflix was not around in the 70's
so governments "rates" are not representative to peoples personal income vs costs
...

when minimum wage went from 7.5 to 10 in that decade
only a 33% rise. but the average cost of goods/living in that decade went up by more then 33% in a decade (3.3%/year average)

the "official" rate was more like (under 3%/year)
2012  2.07%
2013  1.46%
2014  1.62%
2015  0.12%
2016  1.26%
2017  2.13%
2018  2.49%
2019  1.76%
2020  1.23%
2021  4.70%
2022  9.98%*

however the way this rate is calculated due to its bias choice of "goods" to include in its accounting... does not represent what people feel that costs of living caused vs their income.

the simple fact is that the inflation rate is a dodgy number that means not much because it does not correlate to the real goods and services people actually pay for vs their income

EG they say this year its only 10%
yet car fuel, groceries and rent has increased by more then 10%
and those 3 categories are the 3 main ones people FEEL/experience/spend their income on

where they are buying/getting less goods by more than a 10% loss this year

The process of increasing the price of goods is generally uncontrollable, the price of goods in the market is not balanced during inflation. Inflation also occurs due to natural disasters such as floods, the COVID-19 pandemic and other disasters which have an impact on the scarcity of goods and result in unstable and uncontrollable price increases.

Inflation is difficult to predict, if it occurs because natural disasters are natural events, whereas if inflation occurs suddenly, this is closely related because a country's economic processes are not going well.

I will help explain Inflation and Deflation with the simplest possible analogy so that it can be understood.

Inflation is a condition of continuous increase in prices, both prices for goods and services. This price increase has an impact on the weakening of people's purchasing power which will be followed by a decrease in the production of goods and services.

If left unchecked for a long time, this will result in high unemployment due to mass layoffs, poverty, and recession.

Deflation is a condition in which the price of goods and services decreases from time to time which in turn results in a decrease in the wages paid.

Deflation is also characterized by delaying the purchase of goods or services until the lowest price. This of course is very risky for business owners. Because, although people's purchasing power tends to increase business owners have to reduce production costs which leads to business losses.

If the community or business unit stops carrying out economic activities such as spending their money, the existing economic conditions may be damaged.

It seems he is now because he already learned his past lesson. For us who still experience a difficulty due to inflation, we can also follow what he did there which is to work hard. Not just hard but real hard. Means we need to do overtime, if not then we can do side hustles. That way we can increase our income.

Budgeting is also important even if he didn't mentioned it there because no matter how much money you have if you don't know how to budget, it will always be drained out easily. Investing is also a good counter measures in inflation and we don't just invest forever but we also need to sell our assets by the time we need it.

inflation made it difficult for my family to meet their daily needs, and again my family's brick production factory as the family's main livelihood is now bankrupt. This is due to the increase in production operational costs which are increasingly expensive, plus workers who ask for a salary increase because they are aware that the cost of living is now increasing, but the worst thing is that the price of bricks cannot be increased because consumer demand is very rare, somehow we maintain it, but we decided to close the factory because they suffered a lot of losses, now my father and mother become agricultural laborers and farm to survive from time to time, currently life is very simple because the price of daily necessities is very expensive for us.

In essence, inflation is what governments use to reduce the value of your money. Because earnings never catch up to the cost of living or housing, there is no way to do it "correctly." The current level of global debt is so huge that it isn't stable at all, which is driving the world straight into a depression. Deflation, on the other hand is just as dangerous. It discourages investment because your purchasing power improves only by hanging onto a large amount of cash and makes economic development challenging to attain depending how bad the deflation is. If deflation weren't a concern, central banks would have little trouble inducing it by simply raising interest rates and stop creating money, but that would kill the economy of the country just as badly although in a different fashion as too high an inflation.

Inflation, although not the most important economic variable in the world, is a variable that many people feel strongly about. As we go about our daily lives, we are bound to experience inflation at some point. We may deplete our paychecks so quickly because of inflation that we feel that our hard work means nothing but in most middle-class families inflation has very little effect.

I think Inflation sucks. This is a cunning thief. To fight it, we have to be really smart about finances and make sure we always keep an eye on it, especially when it's used.

Someone asked me this question years ago and the answer I gave him was pretty much straightforward, imagine you have a snowball and you are going to climb a mount to put the snowball there but there is an escalator that pulls you down now if you stay there and do nothing the heat of the sun will melt the snowball and if you step into the escalator with average speed again you will fail, so the only way is to move with the rate higher than the escalator. This is how inflation works is a simple explanation.

true because of money. lazy people do everything they can to get money instantly, even though if they try and are determined to do anything they can make money,
debt is not the right shortcut if we don't have money, moreover it's clear we can't return it, at least try not to continue to worsen your life

Many support things that lead to inflation, without realizing the consequences of what they support.

There are many who judge celebrities like Johnny Depp or Amber Heard without bothering to educate themselves on the basic details of their court case. Many feel entitled to make sweeping judgements about celebrities and other public figures, despite lacking basic essential knowledge.

This negative trend has also come to apply to topics like inflation. Over the last 50 years, the moral majority have supported an endless series of poor economic policy which guaranteed inflation would hit eventually.

Our problem has always been the same. People feel entitled to be confident in supporting financial and economic policy. While never having to learn or know the basic fundamentals of either.

The biggest gains can always be made by average and ordinary people making an effort to be informed and knowledgeable on things that have a real and lasting impact on their daily lives. That's the only way things can ever change.

This is the reason why it is important to anticipate that the government must do this, especially for "surprise" inflation. Inflation that occurs in many countries today is due to the domino effect of the war that has occurred so that it creates uncertainty in the decision making by many governments in the world, the ongoing war and the instability of oil prices make our economy depressed.

to keep us from being affected by inflation is to choose investments that have 'limits' or supply such as bitcoin while fiat which is circulated by many countries does not have it, the circulation that occurs to fiat is between excess or reduced since it was first circulated, it is difficult to monitor it.

The increase in the price of goods and the money supply are both effects of inflation that will occur. Fundamental factors that influence the concept of inflation, through the interaction of supply, demand and exchange rates of international and local trading partners, although there are many other factors that can accelerate inflation, usually in these two areas inflation is more likely to occur.

To suppress inflation, the biggest target is to stabilize these two things, this can be done jointly, both the government and individuals and groups.

At the heart of any inflation problem is the emphasis on more potential problems, if basic needs are materials that must be met, then every head of household should be able to buy as much as possible and store it according to need.
The role of the government is also very important to reduce high prices to lower prices, by regulating the prices of basic needs in accordance with existing regulations in each country.

The value of fiat currency will continue to change over time.
A simple example that we can easily analogize, let's say you used to buy a motorcycle for $983.99, but in the next four or five years $983.99 is no longer enough to buy a motorcycle.
This is what is called fiat currency going down and unable to maintain its value.
If the currency value category is defined as inflation, then this factor can be referred to as the inflation base.

More precisely this is the law of supply and demand in the economic system.
If supply and demand are not balanced, it is likely that the price of goods will soar higher than usual.
When the Covid-19 Pandemic occurred, basic needs jumped so high, without anyone being able to control them, including government authorities in this case, the so-called supply and demand law did not run normally during the COVID-19 pandemic, and this did not only happen in the United States, but almost the whole world is feeling the effects.

In general, the impact of inflation that occurs on families in the basic material fulfillment sector, almost most households will experience difficulties in meeting food ingredients when inflation occurs.
Personally I have practiced rice storage during inflationary times which coincided with COVID-19, so the impact of inflation for me is not too big, although I can't completely control it, but to meet these needs I am not too worried and already in the category enough to stock up on a few time.

Based on this description, every head of household should be able to make provision for basic needs, thus this sector can be suppressed and will return to normal.

What are now the causes to this disruption and their examples?

War
Lack of price control policies
Low GDP
Natural pandemics
Hoarding
Poor sales
Lack of production factors
Money supply
Poverty increase level
Unemployment

Let me just limit myself to these few factors that ultimately affected the market demand and supply of commodities in the economy and they are what grow to advance into bringing in inflation of price without control, and all human activities in one way or the other also contributed to this inflation we are talking about even though we give less concern on things we engaged doing on a daily basis.

Supply and demand, in my opinion, is not the best explanation here. Supply and demand can be absolutely artificial in nature (for example, speculation), and therefore do not display a real picture. For example, the same Bitcoin

It's probably easier to explain - it's like a balance of the money supply of the state and an estimate of the GDP of this country. In this case it becomes clearer:
- (A) The state (in total) produces some GDP. With an estimated value, let it be 1 trillion coins.
- (B) State Bank, prints (issues) 1 trillion real coins.
With this approach, there is no inflation.
But if the balance of these indicators changes, then we have either INFLATION (A is less than B), or DEFLATION (A is more than B)
This is domestic inflation/deflation. It, if A or B is violated, also gives currency inflation, since the balance between, for example, estimates of GDP in dollars does not change, but the mass of the local currency grows - we get not only INFLATION (domestic), but also devaluation of the local currency to "indicative" currencies .

At the same time, a very delicate question is which is better - inflation or deflation? And at what volumes? And is it better?

Avoid generalization, ofcourse there will be people or individual perhaps, who are not really aware of what inflation is or how it could affect our daily life. They may know it by definition, but they might not be able to comprehend it if no one will explain it in a more practical way.

Inflation is simply a rise in the prices or marketable things;things we do use on a daily basis, things we desire to possess someday, and such. But it is not as simple as that, because inflation has implications with one's economy because it speaks for the 'purchasing power of an amount" such as your $1 5yrs ago could give you this and that, but due to inflation, your $1 won't be able to get you any, at the present.Hypothetically speaking. That's how it works.

You talked about one of the factors of inflation, which many consider it a main factor of inflation, but recent years have taught me that even if the government is disciplined in printing money, inflation can occur for several reasons:

• Inflation resulting from energy prices.
• Supply chain inflation.
• High interest rates.
• Lack of rationalization of government spending.
• Expansion of lending.

Including, the absence of inflation or stability in prices may not be a good thing, and the Japanese model is a good example.

In summary, inflation is not a problem, but uncontrolled hyperinflation is the problem.

It depends on what that growth is.

If it is a fake growth where the printed money is artificially injected into the economy to fake start the economy in recession, that is going to be even worse because it will cause a much bigger recession (eg. 2008).
If it is real growth based on production where millions of real jobs are created for the jobless where they produce actual products to sell for real money, then it is not a bad thing.

Unfortunately the former (fake growth) has been happening in US over the past 40 years (ever since Reagan era).

Cuba was once the richest nation in latin america. Today its the poorest.

Venezuela was once the richest nation in south america. Today its the poorest.

The states of california and new york were once the richest in the USA. Today their wealth and value are on steep declines.

Perhaps someday people will say that the united states was once the richest nation in north america. "Today its the poorest."

How did this happen?

People of the world will have to step up their game and challenge themselves to figure it out. How the richest nations descend into poverty. Its essential and basic knowledge, if people are ever to learn from the mistakes of the past. And learn to prevent them.

It looks like govt doesn't have any way to get rid of it or slowed it down. The more it will happen the more it will force people to head toward other options. Govt will be forced to accept crypto as one of the legal tenders besides fiat currency.

The USA has a lamp of Aladdin(printing machine). They will print an infinite number of USD bills to fasten the inflation and no one can say or do anything about it. I hope major economical power like China, India, and Arab countries will make a new economical alliance to start trade between them.

As a point of clarification, debt isn't necessarily a metric that can directly be correlated to inflation. Debt to GDP ratio is something that I would pay attention to, and to your point, the money printing in 2020 caused the debt to GDP ratio to fall out of reasonable proportion. Debt can be a great thing as long as the economy continues to grow. Unfortunately the U.S. economy is stagnating so reducing spending is essentially the only way debt will be reduced. High inflation reduces the value of the existing debt the U.S. has to repay, but it also would cause new incoming debt to be placed at a higher interest rate by the issuer. Obviously it isn't in the interest for the U.S. government to continually spend money and have their currency inflate, so they wouldn't attempt to keep up inflation rates for the sake of reducing their debt burden.

Supply/demand AND velocity (the rate of currency circulation). If we print 20% more money but lock people in homes (covid) or we make them fearful about future, we will not see an inflation because people will not spend their extra money. But as soon as we will let them spend their savings inflation will explode. Thats what happened in 2020-2022.


Yep. It takes a lot of time to cause/stop inflation.

1-print
2-house/stock bubble
3-weath effect (https://www.nber.org/digest/aug19/new-estimates-stock-market-wealth-effect)
4-more spending
5-prices goes up
6-stimulus checks
7-more spending
8-prices goes up
9-more income for companies
10-more spending from companies workers/invesors
11-prices goes up
12-more income for companies
13-more spending from companies workers/invesors
14-prices goes up
15-production does not catch up
16-prices explode
17-salaries does not catch up
18-demand goes down
19-companies goes bust
20-supply drops
21-prices explode
22-everything breaks

22 points. Looots of time. Years.

Government prints fiat --> fiat value drops --> inflation goes up
Government prints more fiat --> fiat value drops more --> inflation goes higher
Government prints even more fiat while playing with interest rates --> fiat value drops eve more --> inflation happens with recession

One thing to remember about money printing and inflation is that it doesn't have to happen immediately. For example a part of inflation in US today is because of the money printed in 2020 pandemic.

https://www.usdebtclock.org/ shows the US national debt and how it is constantly going up. It recently set a new ATH at $31 trillion!!!
The site also has a list of other countries, none of them look good.

I don't think there's a user who didn't even understand what inflation is, so I don't see any point from your post.

In short, inflation always happen if the currency has an unlimited supply. Bitcoin has a limited supply for 21 Million and no one can extend Bitcoin supply except you're forking Bitcoin with your own protocol.

Right now is the right time to accumulate Bitcoin to hedging against inflation.

My countries fiat currency lose its value more than 40%. Not only that the increase of oil price leads to a massive price hike in every sector of the economy. Food price increases 100% and other goods as well. Consumers failing to live their standard life due to this. Unemployment problem is at is pike than ever. Education system totally collapsing. Everything seems unreal to me but it is the truth.

The truth is that inflation is a constant in our monetary system. It is a built-in feature, so whether or not there is a pandemic or a war or whatever, there is inflation. The rate rises and fall but it is there. Whether money is printed more than the usual amount or not, inflation is there. Money is devalued little by little all the time. Prices of goods and services rise little by little all the time. Overprinting of money, as a matter of fact, isn't even the primary reason for inflation. The point is that inflation is there because it is intentionally designed so. Inflation is desired.

Formula milk has increased its price due to the supply issue that has been triggered by the Russia-Ukraine war. It's because main ingredients for formula milk comes from Ukraine and we know how affected they are and that's why it's triggered and made the price to increase, that's one of the inflation that we're dealing with in our family. We're also now limited to go outside and dine and we're choosing to cook our own food because it's cheaper although not really cheaper because food is also affected by the inflation and I have seen the price to increase as well. We're still surviving despite all of these harder situations that everyone is dealing with.

There's two types of inflation also:
One is set by money supply as you said, the other is determined by a rise in prices (the two are often used interchangeably but the first is hard to measure and normally doesn't get mentioned by the media).

For example, the first type of inflation increased dramatically over the pandemic but the second wasn't noticed until much later (the prices of most things dropped at the start of the pandemic and continued to stay low throughout - this is also why the current inflation could be reported as being even higher than would have been expected if we just had a normal recession).

The other thing to explain is WHY we have inflation and that's generally become harder to explain. It was initially thought that inflation would cause people to spend their money rather than holding onto it (which it does) but it also disproportionately affects those who work for their income compared to those who invest for it. If you invest for a stable income, workers pay you for the product (in dividends) and likely also pay you by buying similar stocks (in things like a pension). This means a lot of big investment funds are able to perform at 8-20% a year (matching US monetary inflation with the 8%), but workers don't normally see that sort of growth in their salaries.

I left out the idea it promotes the economy to grow by giving a few % instead of a flatline when the economy is stable (for values like gdp) as there's a chance it'd just be measured in another currency that's inflation based if a country's currency was deflationary.

Inflation is quite a convoluted concept that involves money and currency, both objects that contains and retains its value because we believe so. It doesn't help that most economists provide lackluster explanations that doesn't really strike any thought towards the masses, the ones that should know most about this concept.

So I took it upon myself to provide a bit of an explanation on what is inflation in economics, in hopes that this may one day help someone's economics homework (LOL) or at least shed light in this very confusing subject.

For starters, unlike most economics teachers, we wouldn't use analogies, as those prove to cause even more confusion than help. We'll get straight to the point.

Money has a value that we decided it should have, and that value always fluctuates depending on consensus when it is compared to different items or commodities, sometimes even different money. This isn't inflation.

Inflation happens when the demand/supply equilibrium of money is disrupted through numerous causes. In simplest of examples, during the height of the COVID-19 Pandemic, USA printed out more money than they normally do, to make up for the sending of stimulus checks that the Americans can then use for purchase of important goods. And since supply of money is higher and not in balance with the supply of goods, its inherent value fell down. This is but one of the few reasons money could lose value over time, but it is best seen in that particular scenario.

Feel free to chip in more information you are most willing to share within this thread, or better yet, tell me how you and your family is being affected by today's inflation rate!