I’m sure you’ve heard the saying – everything’s getting more and more expensive nowadays, or, back in the day we used to buy with a penny what you buy today with a tenner. And this isn’t without reason, things are getting more expensive, or at least, they seem to be.
We refer to this gradual rise in the price of everything as Inflation. Emphasis must be made here, on the word everything – A rise in the price of a specific product (take computer parts for example) does not signify inflation – that is something completely different.
How the price of everything can rise is not so simple a concept to explain nowadays – before, when currencies used to be connected to the price of gold, prices would rise when the value of gold fell, and dip when the value of gold rose. Nowadays, when the value of say, a dollar, falls, the price of what you buy rises, and when the value of the same dollar rises, the prices dip. In theory, this means that as more currency begins to be circulated, the value of that currency lowers, and so prices rise. But that is usually met with wages that also rise, so things should balance out right?
Well, not always. In the late 1960’s for example, wages increased at a rate that was significantly higher than that of inflation – this meant that people’s standard of living increased, because the money they were earning was increasing at a faster rate than the prices of things they bought. The same cannot be said for current times, when both inflation and wages are either increasing incrementally, or worse, inflation increases more rapidly than wages, leading to a higher cost of living.
There are three types of inflation, being Demand-Pull, Cost-Push, and Built-in Inflation, and two mainly used methods of measuring them, being the Consumer Price Index and the Wholesale Price Index. We’ll try explain them all in as simple a manner as possible.
Demand-Pull Inflation is when people have more money, so they spend more, so things start to cost more.
Cost-Push Inflation is when people have more money, so they spend more, so more resources are needed to produce all that people want to buy, so those resources cost more, so anything that is made using those resources also rises in price.
The Consumer Price Index is a measure that takes an average of the price changes for each item in a group of items and weights it according to its importance. Changes in this index are mostly used to note changes in the cost of living.
The Wholesale Price Index tracks changed in the price of a good before it hits the shelves – in other words, raw material or as the name suggests, wholesale.
The Producer Price Index is similar to the Consumer Price Index, but measures things from the perspective of the seller as opposed to that of the buyer – so it measures the changes in prices received by producers and services
But even with all this new information, the fact remains that Inflation is an impeccably vast subject to try and simplify into 600 words, but here’s a small recap to cover the basics.
- Inflation is the rate at which the value of a currency falls / and price of things rise
- It can have both positive and negative impacts, depending on the position you’re in (someone holding stocks would have their value raised by inflation, while someone buying a house will have their purchasing power reduced by it)
- It can be immensely influenced, if not entirely controlled by, monetary policy
- Inflation, like most things, is necessary for economic growth, but if uncontrolled, can destroy it.
So that’s a basic explanation of what Inflation is – if this article interested you and you want to learn more, start by first taking a look at our next article ‘WTF is: GDP’ and stay tuned for our upcoming, ‘How does GDP affect me?’.
Written by: Anonymous
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