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
Inflation is merely the product of an increasing money supply relative to the number of goods and services available. In fact, some economists even define inflation as “An increase in the money supply”, with the increase in cost of consumer goods merely being a by-product.
>But why does it become worth less when we give money value?
We don’t “give money value”. The market price of any given good (barring government price controls) is the result of an implicit bidding process. If there are 1,000 units of product A available, then the 1,000 people who are willing to pay the most for the product effectively set the price, since they can outbid anybody who is not willing to pay as much. In practice, with most consumer products, this takes place over a long time, and comes primarily from companies setting a price and then adjusting based on how well/poorly a product is selling.
>Could we not assign the same value to the same things we have in an excessive amount?
The problem with doing that is that you now have a lot of that product going unsold, which doesn’t really help anybody. Prices are an important market signal that tell us what the most socially advantageous way to allocate scarce resources is. Setting them in stone results in overproducing unwanted products and under-producing wanted ones.
>Is inflation a law of sorts?
Inflation is basically just a specific case of the law of supply and demand (the real version, which is much more complex than the commonly understood one).
Back when we had hard money (ie, all dollars were backed by gold), deflation was more common than inflation, since the number of goods and services produced by the growing US economy outpaced the increase in the gold supply. It was only when the government issued a lot of non-gold backed money that the value of the dollar fell.
If you’re feeling adventurous, there are two books you can read which go over price dynamics in very fine, very fundamental detail. They aren’t exactly easy reads, but they’re both written to establish economic theory from the ground up, so they don’t rely on any pre-existing understanding. You can also get free audiobook versions of both:
[Human Action](https://mises.org/library/human-action-treatise-economics-0)
[Man, Economy, and State](https://mises.org/library/man-economy-and-state-power-and-market-0)
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