How does inflation work?
In: Economics
When people have more money to spend, they’ll spend it on more things. But, there are only so many products available, so sellers raise prices to keep themselves from going out of stock. Thus, the dollar loses value.
When more money is printed, existing money loses some of its value because there are presumably the same amount of resources and more money available to spend
Inflation implies something getting bigger, but in reality it’s prices getting bigger (inflating) because your money is getting smaller.
Let’s say you and your friends all get $1.00 a week allowance. You give your buddy 50c each week to borrow his bike. He’s stoked, he’s getting $1.50 a week.
But then, as you get older, your parents give you $2.00 a week allowance. Well, that $0.50 doesn’t look so great anymore. Instead of a 50% boost in income, your buddy is now getting a 25% boost in income for the same service.
So he raises his price to $1.00 a week.
That’s inflation.
In reality, what happens is that the government prints money. Well, then there’s more money around, so people have more money to pay for things so people with things to sell increase prices. But since prices are going up, employees can’t afford to live, so they ask for bigger raises, which increases costs for businesses, which causes them to raise prices.
When this cycle perpetuates, it’s called “runaway inflation”. Basically the inflation is causing more inflation. Then you have a problem.
Whether we are at risk of runaway inflation today because we are printing literally trillions of dollars is a separate question. Trillions of dollars also vanished from the economy when coronageddon hit. So, printing trillions will not necessarily immediately create inflation.
But, if the printing press doesn’t stop as the economy recovers, inflation could become a real problem.
I assume you mean about money.
Adult: Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
Kid: Sometimes raw materials are hard to get or people who make things want more money, so the thing they make costs more. Sometimes A LOT of people want the same item, making them raise the price because they gotta make so many.
If you’re talking about air inflation:
Adult: This pressure compresses the arteriosclerotic material in a direction perpendicular to the wall of the vessel and thereby dilating the vessel lumen.
Kid: Air go in but can’t go out, material stretch to make room for air, object now inflated.
On a very basic level, the more money is circulating the less resources the same amount of money buys you. Just imagine an island with 100 people on it. If there is 10 dollars on the whole island, someone might give you a house for 1 dollar (=one tenth of the whole amount of money on the island). If there is 1,000,000 dollars circulating.. 1 dollar probably won’t get you a coconut for exchange.
However, in real economics this leaves the question, why there is getting more money. In our economy, money isn’t directly “printed” by the state. Something many people don’t realize, if you loan money from a bank, the bank has the right to “create” that money. Many think they give you the savings of other people, but that’s not the case. They just put a number on your account and you’ll have to pay it back in the years to come.
There are many subtle ways the state can influence on how much money people are creating by loaning (most important the cardinal rate but there are others as well). One reason why economic regulation wants to keep some sort of inflation is to have a safety clearance to deflation. Once an economy hits deflation (money get more worth over time) it’s getting devastating for everyone. Because people will take out the money of any investments just holding the cash and industry / projects and so all stop.
Another reason inflation happens naturally is the incentive of everyone increasing prices. Shopkeeper every once in a while will increase prices when they think they can get away with it. Workers will demand pay raises. And people taking loans for building a house will have to loan more to pay for increased material and work thus creating more money. And this makes the rat race complete as the value levels down again. The economy only really grows by technical progress, not by pushing prices.
When the people who want to buy things get money faster than we increase the volume of things we can spend on, prices rise. The rising prices is “inflation.”
– base workers (groceries, transport, …) end up having a raise to keep up with previous inflation (otherwise those employees will go bankrupt)
– companies from base workers end up raising their prices to not go backrub
– higher pay workers will ask a raise to keep up with all those raise
– other companies will increase their prices as well (because of their higher paid employees asking raise and because they consume, directly or indirectly, base commodities)
– repeat
In somewhere you also have other factors like how rare resources can become (even temporary), companies (or us, employees) wanting to get as much money as they could that can increase prices somewhere along low paid workers up to higher one.
Imagine you and some others are on a desert island with a tree that only produces 5 coconuts a year. You also have 5 gold coins, which you decide to use as money. It makes sense that 1 coconut is worth 1 coin.
Now someone finds a chest with another 95 coins, meaning there are 100 coins. If you kept trying to trade coconuts for a coin each, you’d run out! So instead the price gets put up to 20 coins. The amount of coconuts hasn’t changed, but the value of the coin has gone down because there are more of them.
Now suppose the tree is less healthy, and only produces 4 coconuts. Since there are fewer coconuts (resources), they become more valuable, and the price goes up up 25 coins.
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money is basically, a number from a big pond made out of bigger numbers. If the pond gets bigger, then the numbers you have have the value of is closely related on how much of that amount of “pond” you have. If the country has, lets say 100 units of gold and you have 1 gold, then you can consider yourself rich. If the country has 10,000,000,000 gold and you have 1 gold, youre poor. The way that “pond” of gold gets bigger can be either by an increased amount of money being made by the country (by trade or companies) or by the country fabricating it (creating extra currency). It really doesnt matter which type of government you have, this rules are the same. The type of government just rules the way the pond is obtained and distributed.
Inflation the easiest way to explain it would be, the more money is around the less its worth.
Imagine a city with having one fast food shop.
Everyone would go there they could ask for the craziest prices and people would pay it.
Now imagine a city with millions of fast food shops. All selling the same food.
The prices would be low to be able to compete.
This is also why communism cannot work. The economy would break.
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