(U.S) What causes yearly inflation, and why can’t wages increase at the same rate?

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(U.S) What causes yearly inflation, and why can’t wages increase at the same rate?

In: Economics

Prices for different items increase at different rates and at different times and occasionally prices like oil actually decrease in price. There are too many factors in play in inflation for governments to be able to control it other than the extremely broadest manner. Wages are a factor in inflation so if you increase wages too much across the whole economy you increase inflation. – https://youtu.be/-dnKdCwCw8o

Currency is just a representation of wealth to make it easier to trade. Wealth generally increase over time, more population, better technology increase efficiency and production, etc. There is a relation of supply and demand between the wealth which is the demand (because more wealth mean you want to trade more) and suppy which is currency (because you need currency to trade).

So if the wealth increase, but your currency don’t, you end up with deflation and it’s bad for the economy (more complex than that, but let’s keep it short). You can’t predict and add exactly the right amount of money to keep the currency equal to the wealht, that’s impossible. There is always variation, so instead we add a bit more money than wealth increase. This mean more supply than demand, which decrease the value of your currency and that’s inflation. We try to target 2% inflation, so that way the variation shouldn’t get us into deflation too much and it’s not high enough inflation to cause problems.

In addition, 2% inflation incentivize people to invest their money instead of keeping it for themselves and this mean that money circulation more into the economy, which is good for growing the economy. Those investment allow funds for companies to expand, build infrastructure, create more job, etc.

For the second part of your question, it should go up faster than inflation because wealth usually increase overtime. The problem is distribution of wealth and that’s a political issue.

>**why can’t wages increase at the same rate?**

They do. Real wages have stayed more or less the same for the last few decades.

That means that nominal wages are increasing at the same rate as inflation.

To keep it simple, two main reason are the root cause of inflation:

1) The printing of money, which automatically causes the inflation of prices (since the currency being printed loses buying power relative to goods, as more of it is printed)

2) Economic development: as the economy grows, people tend to demand more goods. This generates an increase in prices (This is a very important concept in Economy, “The law of demand and supply”)

Final note: this is a simple but very realistic template to answer the first part of your question. Note that while 1) cannot be reversed, if the economy shrinks then 2) works in the opposite direction.

For the second part of your question there are many many factor to consider and it wouldn’t be accurate to generalize the problem. However, to get an intuitive picture, consider all the agents who have deciding power over wages and how they interact in every case, then sum it up. (government, employers, current and potential employees, etc..)

Inflation is caused by money being created faster than goods and services.

Wages are, increasing at the same rate. When you hear that real wages haven’t gone up, it means that they haven’t gone up higher than inflation but at the same rate.