The Misunderstanding Of Inflation

For an economic term that gets thrown around a lot, it’s a surprise that inflation is so widely misunderstood. Perhaps the most commonly understood conception of inflation is simply, the rising of prices. How often are you in a discussion with an acquaintance and the topic will come up of how this or that price has gone up and the person will respond, “Eh, well, that’s inflation, what can you do?”

Sadly, whenever inflation is used in this way it is used erroneously. Facts are, the term inflation is correctly used to reference the increase of the monetary support. Or, put more specifically, when more currency is printed relative to the goods and services in the market. Now that it has been explicitly said, those of you who were scratching your head at first may remember this from an Econ class somewhere along the way.

It is because there are actually more units of the currency now in existence, relative to before and relative to the same number of goods that the prices go up. It’s actually the same principle at work in general price models. Because the supply of currency has gone up and the demand for the same has not (meaning there are not more goods or services available in the economy chasing those dollars) price goes up. It works in exactly the same way for commodities, stocks, and the cost of a loaf of bread at the grocery store.

There is a roaring debate still going on in today’s discourse that questions the actual affect of inflation on the health of the economy but the general consensus for most is that inflation is not positive for a healthy economy. However, there is a small, but vocal population of economists that will advocate for a small level of inflation. Generally, you will find those who advocate for inflation to be on the benefiting end of it.

The beneficiaries of inflation are often the ones who get access to the money before it has gone through the rest of the economy and affected prices. Spending newly created money before the prices go up is like getting a double-discount. Conversely, if you are experiencing deflation, that would often be recognized by a lowering of prices. Deflation can occur when savings are high relative to availability of goods in the market. Naturally, deflation will only last so long because as prices drop, the incentive to hoard money drops. The incentive to spend increases due to the increased purchasing power of the saved dollars relative to prices.

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