How does inflation work?
In: Economics
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.
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