Inflation

[vraiblonde]

How does it work? Or, maybe why is it a thing?

Price of stuff goes up, wages go up, etc etc, but why? Why not keep everything the same? There doesn't appear to be any real benefit to inflating costs and everything that goes into that.

Today I have a note to research and try to understand, but if anyone has a thumbnail sketch in the meantime it would save me a lot of searching and reading.

 

[Hijinx]

How does it work? Or, maybe why is it a thing?

Price of stuff goes up, wages go up, etc etc, but why? Why not keep everything the same? There doesn't appear to be any real benefit to inflating costs and everything that goes into that.

Today I have a note to research and try to understand, but if anyone has a thumbnail sketch in the meantime it would save me a lot of searching and reading.

How does inflation work??
You just described it.
We give the people at McDonalds $15 dollars an hour the price of a sandwich goes up.
Then we get a freaking kiosk instead of a human being.
The kiosk takes credit cards but not cash, forcing us to use a credit card.

If you go to Ocean City and plan to park at the beach, take a roll of quarters or pay with A credit card.
They closed the booths and fired the people in them.

 

[JustACitizen]

How does it work? Or, maybe why is it a thing?

Price of stuff goes up, wages go up, etc etc, but why? Why not keep everything the same? There doesn't appear to be any real benefit to inflating costs and everything that goes into that.

Today I have a note to research and try to understand, but if anyone has a thumbnail sketch in the meantime it would save me a lot of searching and reading.

Classically, inflation is “too much money chasing too few goods.” A more tangible explanation is central banks increasing the money supply too rapidly. But inflation can also be caused by product scarcity, though that type of inflation is usually short and cyclical in nature.

Some argue that some inflation is necessary because it acts as a cushion and allow markets for products to adjust and brace more quickly in a downturn.

Different schools of economics will have different views on the causes too. Keynesian (John Maynard Keynes) hold that money supply fluctuations don’t affect prices.

By contrast, the Monetarist view (Milton Friedman) holds that money supply is the primary factor in inflation.

The Austrian view (Von Mises) is different still and focuses on the fact that humans are rational beings and act rationally.

There is a reason that economics is a social science and you get a BA and not a BS in economics at most schools.

I’d highly recommend Basic Economics by Thomas Sowell for an extremely useful and accessible primer on economics.

 

[vraiblonde]

Classically, inflation is “too much money chasing too few goods.” A more tangible explanation is central banks increasing the money supply too rapidly. But inflation can also be caused by product scarcity, though that type of inflation is usually short and cyclical in nature.

Some argue that some inflation is necessary because it acts as a cushion and allow markets for products to adjust and brace more quickly in a downturn.

Different schools of economics will have different views on the causes too. Keynesian (John Maynard Keynes) hold that money supply fluctuations don’t affect prices.

By contrast, the Monetarist view (Milton Friedman) holds that money supply is the primary factor in inflation.

The Austrian view (Von Mises) is different still and focuses on the fact that humans are rational beings and act rationally.

There is a reason that economics is a social science and you get a BA and not a BS in economics at most schools.

I’d highly recommend Basic Economics by Thomas Sowell for an extremely useful and accessible primer on economics.

Forgive my ignorance.

Does that explain why houses used to cost $10,000, and now they're well over 10x that just 50 years later? That's a real question because I genuinely don't understand it. It just doesn't seem related to classic supply/demand.

 

[JustACitizen]

Forgive my ignorance.

Does that explain why houses used to cost $10,000, and now they're well over 10x that just 50 years later? That's a real question because I genuinely don't understand it. It just doesn't seem related to classic supply/demand.

It’s still supply and demand but there are other factors with respect to real property like zoning, having to pass a perc test, etc. which are government interference in free markets. Also as they say, God ain’t making no more land, so that’s another dynamic (the biggest one) affecting supply and demand for real estate.

 

[transporter]

How does it work? Or, maybe why is it a thing?

Price of stuff goes up, wages go up, etc etc, but why? Why not keep everything the same? There doesn't appear to be any real benefit to inflating costs and everything that goes into that.

Today I have a note to research and try to understand, but if anyone has a thumbnail sketch in the meantime it would save me a lot of searching and reading.

It is unlikely that you are going to have much luck understanding this from a thumbnail sketch or a quick internet search. Certainly silly textbook definitions like Justacitizen gave you aren't worth much. However, if you do manage to get a more than cursory understanding you will understand why the Great Recession and the financial crisis was so devastating, had the potential to be so much worse and why it took so long to recover.

But here is a quick attempt:

Inflation is the result of supply and demand (either for products, services, labor, money, etc). Some inflation is always good. Too much inflation is bad. DEflation is horrid.

Why is some inflation good? In gives people a reason to buy which keeps the overall economy moving forward.

It is easy to understand why too much inflation is bad....but central banks can deal with it...assuming the country issues its own currency and has a central bank.

Deflation is horrid because it can easily become a downward spiral that is extremely difficult to stop. Why buy something today when it will be cheaper tomorrow? Why invest in new equipment...add more workers...buy a home when it will all be cheaper tomorrow. This is where we were headed in late 2008. Deflation destroys value....destroys incentives...destroys growth.

"Keeping everything the same" is simple not realistic. Businesses want to maximize profit...consumers want to minimize cost. Employees want maximum wages...business want to minimize cost. These goals are competitive and force the "market" to determine price of goods, labor, or money.

Obviously this is very basic. But prices have to rise...otherwise what would be the incentive to invest or take risk? If there was no ability for gain (profit), there would be no reason to ever do anything.

 

[transporter]

It’s still supply and demand but there are other factors with respect to real property like zoning, having to pass a perc test, etc. which are government interference in free markets. Also as they say, God ain’t making no more land, so that’s another dynamic (the biggest one) affecting supply and demand for real estate.

Zoning does not have an ongoing effect. neither does having to pass a perc test. Those are one time price adjustments and they are not inflationary as Vrai is asking about. If all properties in an area are subject to the same rules...its also not interference....it is a cost of doing business.

You should have just stopped at supply and demand...then you would have been fine.

 

[Gilligan]

 

[BOP]

It is unlikely that you are going to have much luck understanding this from a thumbnail sketch or a quick internet search. Certainly silly textbook definitions like Justacitizen gave you aren't worth much.

Proceeds to give the same basic silly textbook definition.

 

[PeoplesElbow]

Inflation definition can vary depending on how it is measured.

Back when housing costs were going through the roof the Fed said inflation was not high, that is because they do no include housing costs in inflation. Certainly prices on some things are way less now than they were in the past, we also have more things to spend out money on.

I disagree that things like perc tests do not keep causing inflation, they can and they do because the requirements for them keep going up, there is less available land that will pass etc. This makes the item more valuable.

I don't necessarily think deflation is horrid, usually it is caused by a bubble that had artificial inflation that everyone was riding as long as they could. Bubbles need to pop every once and a while or the pain from a larger bubble will be worse, and it will pop eventually.

 

[GWguy]

Part of this is the desire for self betterment. You've been doing a job for years. You believe you are doing more/better than when you were hired. You ask for a raise. Boss has to make adjustments to pay you more and maintain his profits so HE can get a few more $ and still pay you. Multiply by a thousand workers in a large organization. In order to maintain any profit, the cost of the service/product goes up. Now add in the delivery guy. He used to be able to deliver for $X, but his employees now ask for raises and benefits. His cost for delivery just went up. Add in the receiving staff, the stocking guy, etc, etc, etc...

Consumer pays more. Consumer asks for a raise to cover the costs of the increased price of consumables. Never ending sprial of cost increases. The consumable hasn't changed one bit, but because everyone wants to do better, the price is now inflated.

 

[JustACitizen]

Part of this is the desire for self betterment. You've been doing a job for years. You believe you are doing more/better than when you were hired. You ask for a raise. Boss has to make adjustments to pay you more and maintain his profits so HE can get a few more $ and still pay you. Multiply by a thousand workers in a large organization. In order to maintain any profit, the cost of the service/product goes up. Now add in the delivery guy. He used to be able to deliver for $X, but his employees now ask for raises and benefits. His cost for delivery just went up. Add in the receiving staff, the stocking guy, etc, etc, etc...

Consumer pays more. Consumer asks for a raise to cover the costs of the increased price of consumables. Never ending sprial of cost increases. The consumable hasn't changed one bit, but because everyone wants to do better, the price is now inflated.

Translation: capitalism demands perpetual growth. Inflation will be a necessary and unavoidable side effect of that growth. Central bankers have tools to moderate all of the various inputs to a sound and healthy economy (for better or worse).