Can anyone explain inflation to me?

Only if you really know, because I don't understand the concept of it, and how it comes around.
Additional Details
Put it in words I might understand (I'm obviously not an economist)

Simply speaking, inflation is the continuous raising of prices in a economy.

Period.

Now, talking about the causes, there are different ones.
I will mention three:

1- The most classic, the one that all books describe, is caused by excess of money (any kind of money, not only cash, also loans from the banks) compared to the goods available.

As people has more money in their hands, they go to expend more. If the amount of available goods is more or less the same, more people will be asking for the same product and prices wiil go up.

Since money is also created by banks via their loans (another topic), the classic way of fighting inflation in a normal economy is through the interest rate:
- interest rates go up,
- people ask for less loans,
- quantity of money is reduced,
- pressure over prices aliviates.

2- The second source is called "cost inflation".
If the price of a strategic raw material such as oil jumps (due to a war, for example) , it affects the costs of plastics, transport, energy, air tickets, etc.

The industries affected by those increases will try to defend their margins raising prices of their products. The inflation will spread as a pest.

3- The biggest problem starts when people becomes used to a general price raising for a long time, or when expectations are of a new inflation to start
It is the self-fulfilling prophecy:
As they expect prices to continue raising, they anticipate purchases, increaisind demand, and not looking for lower prices in other shops. In fact, they are fueling the inflation.
The trade, also, fuels the problem, because they charge more in advance to new increases, in order not to be out of business.
Its a "psycological inflation"

All this causes are not isolated, theay act together, in a compounded form, each fueling the others. But the fire can start in each of the described ways.

Hope that this is useful.

In simple terms, inflation is the situation where an identical good cost more that it did in the past. Think of your Big Mac, and how much it has risen over the last 10 - 15 years. Yup there you have it, inflation.

Reason behind inflation:
While there are different explanation behind why inflation occurs, simply it becauses as costs rises (people wanting higher salary, increased competition from developing countries for the same resources, etc) companies have to charge the consumer higher prices, this in turn makes employees (and other businesses) feel poorer, well your allowance / salary can buy less Big Macs if your allowance / salary remains the same while prices of Big Macs keep climbing! And hence you'd want a higher pay / allowance, which in turn cause costs (of your employers / or parents) to rise, which in turn make them want higher prices for their goods and services.. and the cycle repeats itself...

In mainstream economics, inflation is a rise in the general level of prices, as measured against some baseline of purchasing power. The prevailing view in mainstream economics is that inflation is caused by the interaction of the supply of money with output and interest rates. In general mainstream economists divide into two camps: those who believe that monetary effects dominate all others in setting the rate of inflation, or broadly speaking, monetarists, and those who believe that the interaction of money, interest and output dominate over other effects, or broadly speaking Keynesians. Related terms include deflation which is a falling general level of prices, disinflation which is the reduction of the rate of inflation, hyper-inflation which is an out of control inflationary spiral and reflation which is an attempt to raise prices to counter act deflationary pressures.

Examples of common measures of inflation include:

consumer price indexes (CPIs) which measure the price of a selection of goods purchased by a "typical consumer". In many industrial nations,
producer price indexes (PPIs) which measure the price received by a producer. This differs from the CPI in that price subsidation, profits, and taxes may cause the amount received by the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any resulting increase in the CPI. Producer price inflation measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" as consumer inflation, or it could be absorbed by profits, or offset by increasing productivity.
wholesale price indexes which measure the change in price of a selection of goods at wholesale, prior to retail mark ups and sales taxes. These are very similar to the Producer Price Indexes.
commodity price indexes which measure the change in price of a selection of commodities. In the present commodity price indexes are weighted by the relative importance of the components to the "all in" cost of an employee.
Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods from the present are compared with goods from the past. This includes hedonic adjustments and "reweighting" as well as using chained measures of inflation. As with many economic numbers, inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost increases, versus changes in the economy. Inflation numbers are averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices. Finally, when looking at inflation, economic institutions sometimes only look at subsets or "special indexes". One common set is inflation ex-food and energy, which is often called "core inflation".

In classical political economy, inflation referred to the money supply itself: inflation meant increasing the money supply, while deflation meant decreasing it. A few schools of economic thought, generally described as libertarian or ultra-conservative, still retain this usage. In mainstream economic terms these would be referred to as expansionary and contractionary monetary policies.

too much money chasing not enough goods/services.

It's a neverending cycle. Prices go up, which causes workers to want more money from their employers to afford everything [cost of living increase], which in turn causes prices to go up so the employer can afford to pay their workers more.

That's a simplification - obviously, other factors are at play. The increased price of oil causes prices to rise as well, for example. (That's pretty across the board, since all products need to be transported to some degree, and a rise in oil costs means a rise in transportation costs.)

Furthermore, the mere fact a business cost drops doesn't mean the business drops their prices. If they can get people to pay X price for something, why drop it when their costs drop? They end up getting a nice windfall. The only thing that might motivate them to lower their prices is if their competitor does, and a price war happens.

ok, we just learned about this in hisorty class, ok paper money is actually gold. in ny city, they have all the gold there that our money represents. now, if they find more gold, then the dollar bill is worth more, vise versa, if they print more paper money, then the dollar is worth less.

inflation - the price of items increase

the prices increase because the dollar is worth less, it it takes moer dollars to buy it, even though the item is still the same cost / value

Inflation is a phenomenon that occurs with what are called "fiat currencies," like our own dollar. Fiat currencies are backed only by the faith and credit of the government that issues them, they are not tied to tangible assets like gold, or silver.

Essentially, what happens is a nation's central bank increases the money supply at will (as does our Fed). They literally print it. And through the miracle of debt creation and fractional reserve banking, that money gets into the economy very quickly.

When that flood of money hits, it decreases the value of the currency that already exists, as one has diluted the supply of money without creating any additional value. Two things happen. One is simply that more dollars chase the same amount of goods and services, and the second is that by diluting the value of the existing money supply by increasing it, one by definition decreases the purchasing power of the currency.

This is why the dollar today is worth precisely 1% of what it was worth in 1900.

All fiat currency systems in history have failed. Ours will be no exception, and it will happen sooner than anyone thinks.

Superman, an excellent answer, BTW.

Enter Your Message or Comment

User Name:
User Email:
Post a comment:

Archive: Forum -Forum -Finance - Links - 1 - 2 - RSS - All RSS Feeds
The Causes and the Results. 0.024
Copyright (c) 2011 Financial Crisis Monday, May 28, 2012 - Terms of use - Privacy Policy