I understand why inflation currently happens. The price of gas goes up, so the cost of transporting goods goes up, so the cost of production goes up, etc etc. I can wrap my head around that. But how did it start? What was the first thing to go up in cost, creating this chain reaction? Could it have been avoided if the initial thing did not rise in cost?
In: Economics
One tricky thing to understand is that inflation isn’t one thing, there’s lots of types of inflation. They have different causes and different results.
The Spanish Empire used primarily silver coins, but also gold coins as their currency. They mined incredible amounts of gold and silver from their colonial territories, brought it to Spain, and experienced huge amounts of inflation because they had so much gold and silver.
The interwar German and 80s-90s Zimbabwe governments had paper currency, and printed incredible amounts of money to sustain government spending/paying foreign loans. This caused hyperinflation as the past money was essentially valueless
There’s also something known as Baumol cost disease- which is present in many modern economies. The idea is that as economies become more productive, wages in a variety of industries go up, which leads to some inflation. Basically, if everyone is a sustenance farmer, wages are really cheap, so it’s cheap to hire a servant, or really anything, because the alternative is poverty. So an average teacher in a high wage country like the US makes a far higher salary than an exceptional teacher in Mongolia (because a US teacher has other high income options). This is balanced out to some extent- more productive economies produce more goods and services- but it does mean wages go up over time.
Next- there’s inflation that can come from government spending. For example, if the government decides to build a ton of roads, then they may hire a ton of engineers. This can make building high rise apartments more expensive- because they also require engineers, and construction companies are competing with the government for hiring.
There’s also some temporary inflation you can see from disasters/other events- like bad harvests or natural disasters, or supply disruptions. In a hurricane, everyone wants to buy food, so you see price gouging and shortages. When bad weather causes a poor orange crop harvest, orange prices go up. When there’s an auto manufacturing strike- there’s less cars made, so car prices go up.
Finally, there’s inflation targets. Rich developed countries like the US have central banks manage inflation, and often have low, but steady inflation targets. The aim is to keep average inflation low, but above zero. From the above- you can see that some segments of the economy (particularly labor intensive ones) always will have some inflation in a growing economy, so targeting zero inflation would mean allowing inflation in some areas, and forcing deflation in other areas, and deflation is very bad. There’s also some trade off between unemployment and inflation at times. People don’t generally take nominal wage cuts, so if the economy is struggling and inflation is zero, lots of people might get fired. On the other hand, if inflation is high, and wages stay flat, then employees are taking an effective wage cut. This is not popular, but it’s usually easier to accept than salary actually decreasing, and it’s often preferable to a nation than high unemployment.
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