Inflation, is the simple answer. But what causes this? Why couldn’t society just keep on keeping on with prices? Examples, a $0.25 for a candy bar, $0.75 for a fast food burger, $30k for a home etc. It worked then, so why not now, why not just agree to lower the prices of everything?
In: Economics
So let’s say someone has $100. Their buddy wants to borrow $20 and he charges $5 interest because he’s an ass hole. Now, the first guy has $80 and the second guy has $20 which is $100 total. When the second guy pays back the first guy he will have $0 and the first guy will have $105. Charging interest on a loan creates more money supply than your principal amount.
Same principle applies to the US/World economy. When the supply of money goes up, prices go up = inflation. If you’re asking why prices go up when money supply goes up, I’m not sure other than some vague notion about supply and demand.
It’s probably more helpful to think about why money is less valuable now (has less purchasing power) than it did in the past. The government keeps printing or giving out more money to people faster than money is destroyed or taxed.
As something becomes more abundant, it becomes less valuable. Without a matching increase in abundance of goods and services to match how much more money buyers have available to spend, sellers will sell out of their wares faster then they can create them which creates empty shelves which means less money, so sellers have to raise prices so as not to sell out faster than they can meet demand.
If they don’t raise prices, someone else will use their abundance of money to buy them out of that product and then sell it to other buyers for an amount those buyers are willing to pay for it, which is called arbitrage.
Basically inflation happens because buyers have more and more money to spend, and if sellers don’t raise prices to match that, someone will buy them out and resell their products at the higher market value.
Edit to ELIF:
Everyone wants candy and the candy company wants to make as much money as possible.
The candy company keeps raising its prices to make more money until people stop buying all the candy.
Oh no the stuff that makes the chewy gooey insides of the candy that is made from sugar and chocolate was destroyed by a flood. Now there isn’t enough stuff to make as much candy and the trucks to get the candy to the store got destroyed in a flood as well.
This causes prices to go up because the little bit of candy left and the trucks not destroyed cost more because those companies red to charge more or choose to charge more because there is t enough candy to go around so price of what didn’t get destroyed goes up.
Now candy is 50 cents a piece instead of 25 cents.
The cost of gas goes up because of some storm in the ocean. And what happens is a trickle of prices going up everywhere and for simplicity sake things now just cost more and do not get cheaper.
Sometimes things do stay the same price but that’s only if uncle Samuel says it has to stay that price or if uncle Sammy buys stuff to help keep a farmer in business to avoid increases in price.
But overall prices tend to slowly creep up because everyone wants to make more money and businesses want to make more money.
This tends to be okay and healthy for everyone as long as the prices of things do not go up too fast compared to how much people make.
Recently prices have gone up about 24% over the last 4 years and that’s why people feel the sting.
I hope this is a better explanation of why inflation is a main reason for candy not being 25 cents anymore or 30k homes. All the stuff used to make those things cost more and sometimes like with homes people like to play games and pay more because they think it will be worth more money in the future. Like beanie babies! Sometimes they are wrong and then the prices drop really fast because POP goes the bubble.
Left my copy paste answer below so you can see what a dummy I was.
At its root, inflation is driven by too much demand relative to supply. More precisely, as former Fed chair Ben Bernanke writes in his macroeconomics textbook with Andrew Abel: “Inflation occurs when the aggregate quantity of goods demanded at any particular price level is rising more quickly than the aggregate quantity of goods supplied at that price level.”
But what causes demand to outpace supply? That can happen for a few different reasons, and to understand them it helps to consider the three pillars of macroeconomics that David Moss describes in his book A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know. Moss structures the book based on output (how much an economy produces), money (how much currency people have or can easily get their hands on), and expectations (what people think will happen next). All three have a role in inflation.
Supply shocks: Inflation often happens because of supply shocks — major disruptions to an important economic input, like energy. For example, if a lot of oil fields stop producing oil because of a war, the price of energy increases. Since energy is a critical input into almost every other good, prices of other things rise, too. This is often called “cost-push inflation.”
Money supply: Then there’s the demand side of the equation. An increase in the money supply will tend to cause inflation, as Moss explains. “With more cash in their pockets and bank accounts, consumers often find new reasons to buy things,” he writes in the book. “But unless the supply of goods and services has increased in the meantime, the consumers’ mounting demand for products will simply bid up prices, thus stoking inflation. Economists sometimes say that inflation rises when ‘too much money is chasing too few goods.’” This is sometimes referred to as “demand-pull inflation.”
The answer to your question is indeed inflation. And hopefully this helps answer why.
I think another reason not specifically stated is the need for corporations to continually show growth and to do that they need to keep increasing in value and one way to do so is increase revenue by increasing prices. This is good for those invested in the stock market but means little to those who are not. And wall street touches pretty much every sector and that one reason candy is no longer 0.25 or homes are not 30k.
[SOURCE](https://hbr.org/2022/12/what-causes-inflation)
The total amount of economic activity taking place increases over time and therefore the total number of dollars needed to express it must also grow. Let’s say there are 10 people in a village doing different tasks and a day’s work pays a dollar. You need to have $10 change hands daily to express that. If the village grows to 20 people but the currency supply doesn’t keep up then the daily pay must fall to $0.50. Incidentally this is part of why the gold standard (or Bitcoin) can’t work.
Additionally some inflation is generally useful for encouraging consumption and investment. If a dollar holds its value (or worse yet increases) then the optimal strategy may be to bury it. This reduces demand which reduces economic activity. The value associated with that capital is frozen. You want the dollars to circulate, either by being used to purchase goods by the holder or by being loaned out by the holder to someone else who needs goods. That keeps them moving, the holder performed some activity to earn the dollar and now the dollar is being paid to someone else to provide some other goods or services.
You don’t want hyperinflation, but you want some.
Lastly it’s nice for the government to be able to spend without taxing by printing from time to time. Nobody likes taxes but nobody notices when the monetary supply goes up a little. Helps smooth things over.
You really want to buy a new bedroom set. Today it’s $1,000.
What would you do if you thought the price was going to be $900 in a week or two?
What would you do if you thought he price was going to be $1,100 in a week or two?
The first scenario leads to a lot of people hoarding and not spending their money. If people don’t spend money, then companies don’t make money. If companies don’t make money, they are forced to lay-off workers and/or go out of business. This leads to even more people not spending money and the negative feedback loop continues.
In the second scenario, you are going to spend your money now while it’s worth more. More money spent means companies making more money, leads to hiring more workers and/or reinvesting the extra income back into growing their company.
This is why a small amount of inflation is a good thing to have. The US targets to have an inflation rate of about 2.0%
ELI5: Inflation makes money worth LESS tomorrow.
Investing makes money worth MORE tomorrow.
They want you to invest money and make it grow.
So they make money worth less if you don’t invest it.
So, remember the $100 you got for your birthday?
If you invest your birthday money today, then next year it might be worth $110.
But if you stick your birthday money in the bank to save it, then next year it might only be worth $98.
The dollar had more value because people had less dollars to spend. In other words; we’ve gotten wealthier and can afford to buy more things. More people, with more money, means we’re competing with each other for the same resources.
You didn’t ask this but there’s a subtext of pessimism to the question. “Why are things more expensive?” Things aren’t more expensive and, for the majority, they’re better off being born today than in the 80s. Compared to the amount of money you make, the wealth you have now, and your potential wealth everything I can think of is cheaper and better today.
The “economy” isn’t about money, it’s about stuff – it’s always and only about the stuff. Most people don’t want more green paper, they want more food, more entertainment, more products, more medicine and etc.
Even when governments print more money, there is the same amount of “stuff” available. There are only so many doctors who can work so many hours. There are only so many TVs and there is a limited amount of food.
When you print and give out money to people, it doesn’t (immediately) change how many doctors are available, or how many TVs can be purchased. Each personnow has more money and is now willing to pay slightly more to get what they want.
The purpose of an economy is twofold:
– Determine who gets the limited amount of resources currently available.
– Shift production to produce more of what’s important.
No one here is getting to the heart of the problem so I will. Imagine all the money in the US is 10 whole dollars. If the government swoops in to “save the economy” and injects money to the tune of adding 10 dollars it then means there is 20 dollars total now. There was only 10 dollars worth of labor. That means that my 10 dollars is now worth exactly half of what it was worth originally. The real true inflation rate is 50% and it’s not 5% because the cost of goods went up 5%.
Money changes.
Pre 1933, dollar coins had gold in them. You wonder why dimes are small? They were made of silver. Nickles are big because they needed to be to equal the price of the silver coins.
1945 pegged an ounce of gold to 35 dollars.
1973 took us off the gold standard and gold was allowed to float in price.
In 2008 we had quantitive easing to change the value of money again.
In the pandemic the rules were changed again.
Why do we have inflation? Because we keep changing what money means.
It is power creep in a video game. You tweak the rules to keep players engaged, otherwise the ponzi implodes.
Money is debt, and will continue to rise as long as debt is allowed to grow,
If the debt ever has to be paid back, you get deflation, which is debts going bad and money is destroyed.
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