I do not understand how inflation works if my life depended on it. I understand that it’s an occurrence when you have something in excess amount (like money), thus it becomes worth less.
But why does it become worth less when we give money value? Could we not assign the same value to the same things we have in an excessive amount? Is inflation a law of sorts?
It’s so confusing to me.
In: Economics
The economy can only produce a certain amount of stuff. Prices are the amount of money people are spending divided by the amount stuff of people are producing.
The stuff people produce increases over time. As the years pass, we get better organized, we invent better technology, we build more infrastructure like roads and factories.
If the amount of money people spend increases *just as fast* as the amount of stuff people produce, everything’s fine and prices stay the same: You have the same amount of $ chasing the same amount of goods and services.
Mismatches in either direction cause prices to change. Which is disruptive. But doing an exact match isn’t really possible. Because the amount of money people spend depends a lot on individual decisions, and so does the amount of stuff people produce. And people do lots of transactions involving IOU’s.
So most economists come to the following conclusions:
– Mismatches, changes in prices, and the resulting disruption is unavoidable.
– Therefore we should minimize disruption, while recognizing we can’t eliminate it entirely.
– Prices going up is less disruptive than prices going down. So we should aim for prices to go up.
– Steady, predictable changes in prices are less disruptive. Prices going up 2% each year for 20 years is much less of a problem than prices going up 0% a year for 19 years, and then going up 20% in the twentieth year.
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