A Visual Guide to Inflation
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Inflation. It’s bad right? When prices rise your money is worth less and nobody wants to see their hard earned cash decline in value. But what is inflation anyway and what are its root causes? Turns out the situation is not as straightforward as it first appears. In this first of a two-part series we take a look at inflation and examine the pros and cons of this important barometer of the health of the US economy. Stay tuned for part two next week where we look at inflation’s alter ego, deflation. We look forward to your feedback and comments below.
For more personal finance visualizations see: WallStats.com
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Mitch 140 days ago
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Mitch 140 days ago
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Magnus 108 days ago
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Facebook User 48 days ago
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libertad 48 days ago
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Ahmed 8 days ago
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« Previous 1 2The guide, and comments, seem to miss that the real issue is changes in inflation. Wen inflation is constant, it gets built into wages and prices, and the effects more or less wash out. Inflation is really “high” only when inflation becomes higher than expected, and only “low” when it becomes lower than expected. And changes in inflation, whether up or down or even when they more or less balance out, introduce an uncertainty which is bad by itself – economic actors of all kinds get conservative, slowing the economy, and spend significant energy (and wealth) on trying to read the tea leaves.
The “sweet spot” is really about keeping a stable inflation rate, which will have to be at least a little above 0% to avoid deflationary weirdness.
To the pro-gold standard posters:
Adopting a gold standard flies in the face of two serious problems.
First, gold has a radically unstable market value. You might think it an “inherent stores of value,” but an ounce of gold is worth a whole lot more Big Macs today than it was a few years ago, and it has dropped just as dramatically in the past. Compare the purchasing power of the dollar to that of an ounce of gold over time, and you’ll see that hoarding gold has always been a risk-filled strategy compared to hoarding dollars. People who want to know how much food or clothing they can buy tomorrow, or when they retire, can sleep much more soundly with today’s greenbacks stuffed under their bed than the would with gold-backed dollars.
Second, if the U.S. declared that every dollar bill was backed by a dollar’s worth of gold as of midnight tonight, there would have to be that much gold in our national reserves. But M2 alone is around $10 Trillion. (All the gold ever pulled out of the ground is worth maybe $5 trillion, at today’s stunningly high price but before we try to corner the market, so maybe by driving up the price as we going along, we could gather $10 Trillion in gold.) That’s an incredible amount of public spending to avoid the risk that public spending is not constrained by a gold standard.
(Any attempt to set a “reasonable” reserve percentage below 100% becomes subject to the same political pressures, in times when we will want to print more currency, that scare us towards using a gold standard in the first place.)
Let’s just go back to the old meaning of inflation, the true one: Inflation is the inflation of the money supply.
CPI/ price measuring is just a way of measuring how much less the money is worth. More money => money less worth => prices rise.
The problem with CPI is that it can be manipulated. CPI is a basked of chosen products that are weighted.
I’d like to reiterate Dan’s point, because it’s the most significant portion of the inflation equation and it was left out of the original article: banks loan money they don’t have, and this “money” gets into the system (digitally), increasing the total money supply.
So it’s not just the federal government printing more $100 bills that increases the total amount of money in the system: it’s banks writing loans with no real backing.
It’s like a vast, institutionalized Madoff scheme.
This is why they say “Money is Debt”.
cf: http://www.youtube.com/user/compelled2283#p/c/879A14495D29C64F/0/_doYllBk5No
inflation is not a likely indicator of a growing economy, price deflation is an indicator of economic growth when that used to mean increased productivity.
one of the great myths is that for growing economies there needs to be an expanded money supply. NOT TRUE!
for example: the 1920’s mistakenly referred to as a laize-faire / free market boom the USA saw dramatic increases in productivity which should have made goods cheaper as they cost less to produce. in reality prices rose because of massive inflation by your friend the federal reserve. this new money and excess credit lead to rampant speculation and the eventual stock market crash. during this time, Hoover and other good old boys in the GOP were protectionist and imposed tremendous regulations on the free market. Murray Rothbard expertly details such here: http://www.lewrockwell.com/rothbard/rothbard211.html
detailing that the old GOP was very protectionist/corpratist and not pro free markets at all. inflation is always theft as described by John Maynard Keynes.
Inflation is due to money supply and only reason for this is all countries abolished metals and move to fiat (paper) currency thanks to European bankers. The more you print it the more it erodes in value. Wealth cannot be destroyed, so if you keep your currency in gold you wouldn’t have inflation. Compare prices from Roman era and they will be same today.