This thought came to me as I was food shopping. So I know there are things that increase the price of certain items (beer, cigarettes, sugar tax – UK) but they also increase with inflation each year like other foods such as bread.
Apparently, the average inflation raise over the last 10 years in the US is 2.37% as of July 2023. So if it is the same in another 10-years, over the space of 20 years inflation would be 4.74%, if we say inflation is the same? And so on and so on. If it continues wouldn’t prices, for say, bread just end up getting higher and higher and be like $10-15+? And as wages don’t rise with inflation the same way foods do fewer and fewer people each decade could afford it?
Now this is just random thoughts I had when shopping and I am not making any comments on any politics. All I wanted to know is, is my thinking true that prices will just go up and up indefinitely decade-on-decade, why or why not? And I am an idiot so imagine I am 5.
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Edit: Went to sleep and woke up to about 300 notifications, thanks for your explanation to a Neanderthal like myself.
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In: 4366
It can and will continue to exponentially inflate over time. It’s because money isn’t real. It’s a thing we created to control the allocation of goods and services. This is because barter is a horribly inefficient way to run an economy. It’s basically a form of social energy. Money is just the allocation of these goods and services, but it doesn’t create them. If we gave everyone a million dollars, everything would just cost a helluva lot more.
So, every society ends up resorting to some sort of currency. Because the population grows so does the supply and demand of goods and services. If you use a currency that’s in limited supply (like gold), the value of gold will go up or down based on supply (people mining it out of the ground) and demand (people creating/consuming more goods/services). While the gold standard is heralded often, it’s actually a very bad way to run an economy as it will encourage pooling of resources to a smaller percentage of the population. Low inflation/deflation makes wealth inequality worse while high inflation makes it better, but it’s not without its own drawbacks.
With money, it’s actually better to have it inflate over time as this incentivizes people to invest and spend the money. If money gained value, people would just hoard it. This is the main reason the fed was buying up treasuries and lowering interest rates to help the economy. It makes fixed income investments less viable so people with money have a strong incentive to invest in businesses that hire workers and create goods/services. Periods of deflation are often accompanied by sky high unemployment.
The downside of too much inflation is that it hurts savers and people living on fixed income. It’s not like your pension magically goes up to match the new cost of living, but it’s ironically better for working class people without savings as it generally is accompanied by lots of upward wage pressure and extremely low unemployment as lots of people transfer their fixed income investments into business investments. We have been seeing this over the last few years as wages have been growing super fast in a high inflation environment where they were lackluster before.
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