Hii! I am Deepjit Karmakar founder of thecommercialinfo.com, today here in this article I am gonna explain you what is inflation.
Have you ever thought about how your grandparents could buy a house with the same amount of money that would only be enough to buy a used car now? Yes, the prices for things are constantly increasing, and the main reason is inflation. Here is a fun fact for you. In 1960, if you bought a small bottle of milk in the UK, it would have cost you three pennies. Today that will cost you fifty Pence. Is it possible to purchase anything nowadays with just three pence? Probably not.
Definition of inflation:
“The rate at which prices increase over a predetermined time period is referred to as inflation. Inflation is measured by the general rise in prices or a nation's cost of living."
Let's talk about inflation.
Basics of inflation:
Traditional economics dictates that there are two leading causes of inflation.
There is demand-push inflation and cost-push inflation.
(I) Cost-push inflation:
Cost-push inflation happens when business expenses increase, and these additional expenses are transferred to clients. Soap with cost-push inflation, what happens is that the price of your inputs are your raw materials go up over time, which could be because of anticipated events or unanticipated events, like a natural disaster. A good example is how many countries' money situations have changed after the covid-19 lockdown ended. As a result, there have been numerous challenges in the supply chain, including delays and cost increases in shipping and a shortage of labour in specific locations. Due to these obstacles, the cost of production has undoubtedly risen, with the majority of these inputs being reflected in the final price.
(II) Demand-pull inflation:
Demand-pull inflation happens when the demand for goods and services outpaces supply. This occurs when the economy is strong. Demand-pull better reflects what happens when the economy is very close to total capacity. If the economy is functioning efficiently, individuals may perceive an increase in their disposable income, leading to an escalation in the requisition of commodities and amenities. And if companies operate at total capacity, they must increase their production to keep up with that demand. Some people who study money think that printing more money can be a big reason for prices going up. Around the 70s, a new type of you came to the forefront. And that was posited by famous economist Milton Friedman, and his view, and he said this, is that inflation, primarily and everywhere, is a monetary phenomenon.
(Q) So, is Milton Friedman's theory always right that increasing the money supply causes prices to rise?
The fundamental concept of Keynesian economics is focused on government action. According to Milton Friedman, this is the purview of Central banks, and if you look at the response to the Great Financial Crisis and the Pandemic, what Central banks have done internationally, or at least in advanced nations, has helped to expand the amount of money supply that is accessible. And so many people who believe in Milton Friedman's monetary theory of inflation suspect that because the money supply has expanded, that will eventually be highly inflationary. The consumer price index is a way to measure how much prices for things we buy are going up. It's calculated by measuring the percentage change in the price of a basket of selected goods and services a typical household uses over time. This is called a basket and can include the price of goods such as food, cars, furniture, and apparel, as well as the price of services such as rent, medical costs and recreational spending.
Inflation means prices are going up, which is often a good sign for the economy because it means it's growing and people are working hard. But when we talk about hyperinflation, we enter a completely different stratosphere.
Hyperinflation:
Hyperinflation is when prices spiral out of control, with the inflation rate typically increasing by more than 50% per month. Though many things can trigger hyperinflation, it is most commonly caused by excessive money supply and a loss of confidence in the economy or monetary system. In the case of the weimar republic, in Germany, for example, post World War I, they were experiencing inflation, with average information of about 300 % points per month.
There are loads of these images from the 20s of little kids using stockpiles of cash as Lego because money was worthless. But inflation does not need to spill over into hyperinflation territory to cause trouble. In the 1970s, the world's developed economy witnessed double-digit inflation. But how the chair of the US's Central Bank handled, it made the history books. What happened was that there were a few sudden changes in the amount of things available. We spoke about cost-push, when things become more expensive. One reason is when we have less energy to use, like what happened in 1973-1974 during an oil embargo, and again in 1979 during the Iranian revolution. This made the cost of oil go up really fast.
At the same time, you had some other things going on; back in the US, President Nixon had pulled the US out of Bretton Woods. He had removed some price controls on certain goods and food. So all those things contributed to a slow and steady rise in inflation. When we considered other things that happened because of it, wages kept going up and up. So workers started demanding a pay increase. And at one point, inflation reached about 14 %. And this was around 1980. And then Fed chair Paul Volcker said, "Okay, well, inflation is the enemy; we have got to cure this." And the only way we can cure this is by hiking interest rates. So he kept hiking and hiking, and the Fed started this interest rate hiking cycle, at which interest rates in the US reached 20 percentage points. Eventually, they started taming inflation, which went down to three percentage points by the mid-80s. However, it was costly as over 4 million Americans were without jobs then in the US. And it was it led to an economic recession in the US. So that was the trade-off dad they had to make. The economy had to go through a difficult adjustment period to keep the inflation team or bring it back to tame levels. This is why people don't want to return to the problems we faced in the 1970s and the tough choices we had to make afterwards.
