6 Things about Inflation

Jordan Giacometti, Aidan Bishop, and Cheyenne Bledsoe

How does Inflation Affect the Economy?

  • It impacts the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields, and every other facet of the economy.
  • Inflation can be both beneficial to economic recovery and, in some cases, negative. If inflation becomes too high the economy can suffer; conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases, consumers have more money to buy goods and services, and the economy benefits and grows.
  • The impact of inflation on economic recovery cannot be assessed with complete accuracy. Inflation will differ as the inflation rate varies.

What causes Inflation

Rapid wage increases or rising raw material prices are common causes inflation. Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money.

Types of Inflation

The Quantity Theory - This says inflation is caused by too much money in the economy

Demand-Pull Theory - This says inflation happens when the demand for goods and services exceed existing supplies

Cost-Push Theory - Says inflation occurs when the cost of producing goods and services rise and that cost gets passed on to the consumer through higher prices

Major Changes in the U.S. due to Inflation

The United States has experienced two currency collapses due to inflation;

  • First was the Continental Currency during the Revolutionary War.
  • Second was Confederation notes during the Civil War

Also there was the great inflation, this was the defining macroeconomic event of the second half of the twentieth century lasting almost over 2 decades.

  • This was considered the greatest failure of america macroeconomic policy in the post war period
  • That failure also brought a transformative change in macroeconomic theory and, ultimately, the rules that today guide the monetary policies of the Federal Reserve and other central banks around the world.

What Countries have the Highest inflationI Rates Compared to Last Year?

  • Venezuela 159.06%

  • Ukraine 49.98%

  • South Sudan 41.1%

  • Yemen 30.03%

  • Malawi 20.06%

The Worst Kind of Inflation

  • Hyperinflation is a rapid increase in the cost of goods and services over very short periods of time. This can often happen during times of war, sociopolitical upheavals, or other government crises.
  • When hyperinflation occurs, all hell breaks loose. Whereas inflation is gradual, and hopefully not very noticeable
  • There are books dedicated to this subject, but the net result is that money starts getting printed rapidly, in higher and higher denominations, and the value of the smaller currencies become worthless. When you're paying $1,000,000 for an apple, you can't buy much for a $1 any more