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.
The short answer is yes. I’m 67 years old and I remember when a pack of cigarettes or a gallon of gas were 29 cents. A soft drink and a bag of chips was 25 cents. A new car was under 2000 dollars. You get the picture.
You know how everyone jokes about how their grandpappy says he could buy a car for $3500 and a house for $10000? Well he actually could have.
The general consensus among economists is that we always want a very slow inflation because stagnant or shrinking economies discourage investment (your money will be worth more later if you just hold onto it) and growing ones encourage investment and spending (there is less reason to just horde dollars because they will be worth less over time).
Because governments want to encourage spending and growth, fiscal policy is directed to a continuously growing economy, and aiming for a continuous, but slow inflation. That is why, except when things go wrong, there will always be continuous inflation.
As per wages, in theory they should trend upwards with inflation but in reality they tend to lag behind it and then raise in bursts when it becomes impossible for the current generation of those working for low wages to survive and then stagnate again.
In 100 years the minimum wage will be 100 dollars per hour and that will be to scrape by with room mates also making 100 per hour.
(Didn’t do the math)
Aside from what others have said, there is something massive OP is missing.
Inflation is really not that easy to measure. There isn’t one good way to measure it. This flared up in economics debates very big these last 12 months.
Inflation is hard to measure because it’s not a uniform phenomenon. Over the last 20 years, for example, flat screen tvs dropped in price significantly, while medical and tuition costs soared.
This means that not every person experiences inflation the same way. If you were relatively young, healthy, didn’t go to college, and didn’t live in certain metro areas where rent went up quickly, the last decade or two probably felt like almost no inflation occured, because the categories I just listed account for a large percentage of the inflation basket, and an individual like that just wasn’t impacted.
My point is that inflation and it’s impact on society is very complex.
Yeah prices on everything goes up. Movies used to be $1. Now they’re $15 or more.
If inflation goes up too high they just knock some zeros off the end of the currency (revaluation). Zimbabwe famously did this several times. Turkey chopped 6 zeroes off their currency in 2005. Romania also revalued their currency in 2005. So something that was 10000 became 1. Venezuela revalued their currency two years ago, a 1,000,000.00 note became 1.00
The US Federal Reserve has a publicly stated goal of ensuring inflation stays around 2% annually. This number is entirely arbitrary, but yes, in the long term prices will continue to increase decade after decade, or at least the Fed will try to make that the case.
Lots of people have given you good explanations about why small amounts of inflation are necessary, but I’m going to add an additional element most people tend not to think about. Measured inflation works for short term tracking, but tends to begin falling apart after 20-25 years and stops tracking with actual cost.
Let me use a simplistic example: in 1912, a steerage ticket on the Titanic to cross the Atlantic one-way was $35, or £7 in 1912 currency. Adjusted for inflation using just tracked annual changes, that would be $1071. Thing is, £7 in 1912 was equal to 7% of working class ANNUAL wages at the time. So the real cost today would be the equivalent of 7% of median income, or $5,662 in the US, or £2,702.
The equivalent product today (coach ticket on an airline from Heathrow to JFK), costs about $800 on average. It’s also 21x faster.
So, in order to measure inflation over time, to take into account technology, new forms of surplus, superior options, etc, it’s a lot more meaningful to measure median earnings labor hours needed per basic life need. Over the past 100 years, things like food, energy, communication, and travel have become dramatically cheaper. Housing and education have skyrocketed. Healthcare is the toughest to measure because while it costs way more in terms of labor hours today, it’s also insanely better and we can cure a lot of things now that used to kill you.
You get inflation because of exploitation by an elite class. We have fiat currency, so they create money with no tether to underlying energy resources and no interest, thus creating a compulsion towards growth. This creates some inflation and then growth always trends to market concentration aka rent seeking, which in the best case is called demand exceeding supply, but in all cases is built upon the lie of externality. This rent-seeking creates more inflation.
Traditional economics is built upon hiding the omnipresent effects of saying side effects don’t matter, that everything in this garden of life isn’t connected to everything else, only inputs and profits. This is the lie of externality and this lie fuels exploitation, which is the engine of capitalism.
In this way inflation is so much a measure of current exploitation, though there is a lag so it’s more like externality causes hysteresis and inflation is the impact of prior ignorance, an ignorance which again is willful because its how you normalize exploitation, its the cognitive dissonance of capital.
Now our economic engine is literally powered by energy, and so it is this market which continually drives inflation, though these days financial capitalism and it’s cancerous quest for continuous growth is the strongest driver: going on physics alone we see that constant growth is a synonym for the very act of inflating.
But back to energy, Nate Hagens points this out well on YT: all this inflation and growth and economic activity is powered by an incredibly unique and rare moment in the planet’s history: the carbon pulse. We have liberated energy via carbon fossil fuels from the earth tens of millions times faster than it was sequestered. The correlation between oil consumption and GDP using logarithmic scales is .96r², ie in lockstep , oil is the economy.
The amount of work in a barrel of oil is equivalent to 4.5yrs of one human’s labor. This is seen in the abundance of machines and the energy that powers them, this comes out to about 4.7 billion human worker equivalents being added to the economy every year. Exponential levels.
As the economy grows we are creating new nodes, city growth transpo hubs and routes new products etc, each of which requires energy to maintain. Our economy then is a huge energy dissipating structure operating at unsustainable levels, and that word dissipating is key because it points to what is being ignored, what is trying to be outrun: the physical fact of Entropy.
Externality, then, is a lie most fundamentally because it ignores the omnipresence Entropy, which to paraphrase an old saying about the Devil, you may ignore entropy but it will never ignore you. The exponential growth powered by the never-to-be-seen-again carbon pulse that powers inflation is not sustainable in an energy system like our planet. Inflation then is fundamentally a measure of debt owed to entropy and which our future generations will pay with their lives and the decreased quality therein.
The point is that a very small percentage think they will still be on top no matter what catastrophe comes and that is why we proceed headlong down this path. Inflation doesn’t hurt them and helps their profits and power, and this is why inflation will always increase, it’s built into their game they control.
In the past wages were largely pegged to inflation so you would get increases that kept pace with inflation. Changes in tax code that started in the 80s have stagnated wages for the most part and eventually something is going to have to give to correct it because you are right, it is entirely unsustainable. Historically when things got out of whack the society largely collapsed as was seen in most ancient empires and more recently in many revolutions. Social inequity is the killer of societies so the only question is will the current ruling groups get their shit together and avert the next collapse or not.
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