What Is Inflation?

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What is inflation? What does it mean and where does it come from? The term is relatively straight foreword as it means something that expands and becomes larger. If you blow air into a balloon in becomes larger and larger, the more air you blow into it.

But what does it mean when we hear the term “inflation” in an economical and political context. More often than not it refers to money and prices. In the past, income and prices were amazingly different from what they are today. An extremely wealthy person at the turn of the 19th century would make on average 10,000 pounds a year in the UK. Today that’s half what a primary school teacher makes.

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Another, more recent, example would be that in the 1970s a cinema ticket would cost 70 pence while today that exact same ticket is 13 pounds. Governments keep a close eye to what pushes inflation and try to keep it as small as possible. Unfortunately however, there are thousands of small variables which influence the rise and fall of prices, the economy and people’s wages.

In any case, there are three major reasons why inflation happens.

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Number one is called Cost-Push Inflation. This phenomena takes place for a number of reasons. Some of which could be that resources are becoming more expensive or because the rents for businesses are going up or because there aren’t sufficient specialized workers in the field. These in turn will force these companies to raise prices, not because they want to but because they need to, otherwise they would go out of business.

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Secondly there is Demand Inflation. This happens for a rather good reason. When people have more money, so do their needs increase and their spending habits. Now if the supply remains the same or isn’t able to keep up with the demand, like in the case with real-estate market, prices tend to go way up. In this case governments can also cause inflation by lowering taxes. Less taxes to pay, more money to spend, the bigger the prices.

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The third cause for inflation is Governments Printing Money. This is usually done in order to stimulate the economy to creating more jobs. This can be done by literally printing more cash or borrowing more money from foreign parties, or by letting banks make bigger loans on the same security. All of these however have the same result. In any case there will be more money going about, but their value will drop as a result. The more you have of one thing (including cash) the less the value it has.

Now we can see that inflation is sometimes used to better the economy, but the problem is that not everything goes up at the exact same rate. So it often happens that prices go up faster than wages can keep up. Inflation wouldn’t do any harm if everything would go up at the same rate.

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Now if inflation goes out of control like in the case of Hungary in 1941 or Germany in 1921 or Zimbabwe in the 1990s , the results will be disastrous. As a result, our savings will be the ones which will be the ones most affected. Because of inflation people will not know how to make calculated expenditures and will not know what their savings will be worth in the future.

This is more or less the result of us not having a strong grip and understanding on the world economy. There are simply too many variables which we have to take into account at the right moment and which we currently cannot do.

We give a special thanks to the guys at The School of Life for sharing a video about inflation and teaching us about the nature of this phenomena.

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