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
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
Please follow and like us: