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