ELI5- what causes inflation?


The economy is literally just people passing money around. What causes the value of a currency to decrease?

In: Economics

Nearly every government in the world prints money nearly constantly, although at different rates. This is normal and calculated for and usually very managable. However, a large part of transactions that a country (which prints money) relies on is the power/conversion rate to other currencies. I lived in Argentina when this exact thing was happening. Although the economics are complicated and I don’t pretend to understand them fully, essenitally this is what happened:

5 Argentine Pesos = one US dollar

You want to buy an iPhone? It’ll cost you about 5 times as much in pesos, numerically ofc.

From many motivating factors, from debt, to economic instability, or worldwide events like coronavirus, this rate can go up and down.

Right now, the conversion rate is 68.01 pesos to one US dollar, meaning that in order for the government, or a citizen trying to buy an iPhone, they’ll have to spend or print more money for what used to cost them a fraction less in pesos.

The motivations for instability in the exchange rate are very complicated and not completely understood by anyone. They’re closely tied to how inflation works.


(Take what I said here as a low-level interpretation of how inflation works, I’m speaking anecdotally without any degree or qualification in economics)

inflation is when money becomes less valuable and this can have different causes.

Money is being printed.

People have more money to spend so theres more money being moved around and however much u had before isn’t as valuable. Caused mostly by tax breaks.

Things become more expensive and so however much money u had can not buy what it used to be able to. Caused by increased costs to run a business.

The main reason for inflation is due to credit expansion by banks.
1. Someone deposits money into a bank.
2. That bank lends out the money to a borrower.
3. That borrower deposits that money into a bank.
4. If that deposit is with the same bank, that bank lends out the money again.

As a result, the money supply keeps expanding despite the amount of notes and coins remaining constant (unless the government runs a non-monetised deficit (where they print more money rather than borrow to fund the deficit)).

A certain amount of inflation is vital to most major economies when it comes to investments.

If the money in your bank account would be worth the same amount in 20 years you’d probably just leave it there.

The fact that it looses around 3% of its value every year usually forced propel to invest their money (often in companies on the stock exchange) as they are hoping to get more than a 3% return and therefore ensure that their money doesn’t loose value.

As a result we are essentially helping companies grow, and they don’t have to go to the bank and take on a load of debt to do so.

Also, wages and house prices generally rise with inflation (houses often outpaces it)

If, however, inflation is too high the real losers are people who are retired because their pension pot is static