What is Inflation? - YouTube

One of the oddest things about economic life is that the prices for things keeps rising?

Incomes and prices in the past were amazingly different from what they are today [in] Pride and Prejudice, Mr.

Darcy supposed to have [been] one of the richest people in britain

It's 1813 and his income is 10,000 pounds a year today

That's less [than] [half] of what a primary school teacher straight out of college would earn in sense and sensibility

[there's] an argument about whether an income of 20 pounds a week is enough to make you well-off and the answer is yes

It's there in living [memory] to a cinema ticket was 30 p in 1970 today

It's 13 pounds, so what does inflation happen and should we worry if it does?

Government's track inflation, obsessively and try to keep it low

there's a vast amount of [data] collected all the time to ensure [that] governments can say with amazing precision how the

Inflation rate is going

is it on track for two point three percent per annum [or]

Might the increase of low point three eight percent in February be a cause for alarm

This is in big historical terms a relatively new concern

In the 17th century the Spanish Empire essentially collapsed from inflation without even realizing it was occurring

So over time societies have become obsessed with measuring [inflation] and very focused on managing it

So why is there inflation? What makes it happen there are basically three reasons?

The first is what economists call

cost-Push inflation

This is where the costs to businesses rise and are then passed on [to] customers

There can be a lot of reasons for these rises firstly raw materials

Especially oil might get more expensive for a very nice reason because a lot of countries are developing and doing well

secondly workers might be asking [for] more money and

Succeeding either because they've organized themselves well politically or because schools and colleges haven't been training enough workers in the skills that companies need

Thirdly land rents might be increasing because not enough factories and offices have been built which tends to come down to political

Failures around building permits the result of all this is that businesses then push their extra on to the consumer by raising prices

They don't want to it's a scary move but they have no choice. They'd go out of business otherwise

The second kind of inflation is called demand inflation

This is when there are increases in the number of people who want something whose supply can't keep up

The most common cause of demand inflation is an otherwise rather nice thing that people are getting richer and have more money to spend

That's why government can cause inflation by lowering taxes everyone loves tax breaks because they raise disposable income

But in the longer term raising demand can also cause price rises thereby negating some of the initial boost of the tax break

similarly a fallen interest rates may cause short-term pleasure and long-term inflationary pressure if

Interest rates on loans or mortgages fall we might be tempted to take out a loan [to] buy the new car

We've always wanted but the car company sensing solid demand will soon enough

Jack up the price if banks and governments inject more cash and credit into the economy people have more money to spend

But if they're all chasing the same number of goods as before [it] just means they can all offer more for the same

This is what happened around housing in the uk particularly in London

They were broadly the same number of houses there were 25 years ago, but they all costs an absurd amount more

The third classic cause of inflation is government's printing money

There's a deep logic behind this idea which can at [first] sound almost criminal

Governments often want to stimulate the economy to create more jobs

So they print more money this can be done literally by increasing the number of notes in circulation

Or they can do it by increasing government

Debt or by letting banks make bigger loans on the same security in all these cases the amount of money in circulation

Increases, but there's a big problem because after a while it means the worth of every note starts to fall because more notes are

Chasing the same number [of] things to buy. There's more money about but it doesn't buy you more it just pushes up prices

However, there is a possibility here spotted by the economists and [Philosopher] John Maynard Keynes

It takes time for the value of money to fall so for a little while

There can [be] more cash around and prices haven't yet risen this is a window of opportunity

[that] economies can with a lot of luck [cease]

At such Goldilocks moments people can actually increase their consumption

Firms can afford to hire more workers and buy new machinery and once they've done that production will increase

There will be more stuff to buy before inflation is eaten up the [gain]

So there's a real expansion a bit of inflation can grow the economy

That's a big but contested idea

The argument is that it doesn't matter if prices are going up [ten] percent every year [if] wages are going up 15 percent

So deliberate government-led inflation can be a mechanism for growing the [economy]

But it's a very risky move which is often backfired and been attacked by the great enemies of the Keynes ian's economists people

we now know as the

Monetarists who believe that anything which increases inflation is always going to [be] an issue and must be avoided at all costs

whatever the short-term

So why is inflation such a problem the real problem? Is that not everything inflates at exactly the same rate if

Everything went up by hundred percent a year and so did everyone's income and it was all totally steady and predictable

It would be weird

But it wouldn't actually do any harm the harm comes from the fact that not everything changes at the same rate

in 1941 in Hungary

inflation reached

[150,000] percent each day a jelly bean that [cost] 10 p on Monday morning would therefore cost the equivalent of

150 pounds on Tuesday morning, and

225,000 pounds on Wednesday morning, that's incredibly complicated

But it's a problem [only] [because] other things would not be increasing as fast

If you kept your life savings under the mattress you'd be wiped out in a day [or] two

The money that could have bought you a house on Monday would get you a jelly bean on Wednesday

This is the Ultra Extreme case, but it illustrates a basic point

Inflation is bad for savings

There's no point in putting money aside, and that's a pity because saving money the attitude of saving up for things before you buy them

Is an admirable?

characteristic

keeping inflation Low rewards prudence

It helps long-term planning because you can know what your money will be worth in the future and this rewards taking care around costs

Ultimately what inflation reflects is the instability of the world and of life itself?

Prices rise because we can't yet keep the complex system known as the economy under control

There's always something going wrong or growing or falling or failing somewhere

Ideally would keep inflation under control with a more or less fixed amount of money chasing a more or less stable amount of Goods

But in reality [low] inflation is extremely difficult to achieve because so many factors can derail it

cost of Materials cost of [Labour] productivity

Taxes falling or rising exchange rates again falling or rising a growing domestic economy a neighboring economy. That's growing

Falling interest rates the buying of government bonds or the printing of money in the end we may have to accept that?

Inflation is a bit like the weather or our own moods something that's inherently rather unstable something whose ups and downs

We must endure even as we try to mitigate the extremes learning to live with inflation belongs to wisdom