A Science for Everyone

Inflation

Inflation is one of the very basic, very important economic concepts. It is deceptively simple. Increase the supply of money, and it’s like inflating a balloon. The amount of air in the balloon increases, the amount of money in the system increases. This is essentially what happens whenever the government prints more money.

When the amount increases, the value of each individual unit goes down. This becomes more difficult to understand, because a dollar is still a dollar. However, a dollar doesn’t purchase as much.

Think back. Remember. How much was gasoline ten years ago? Twenty? Thirty? But it’s not always the price that increases. Sometimes, the amount goes down. Candy-bars, anyone? They’ve shrunk considerably since I was a child admiring them in the checkout isle. Of course, some things increase in efficiency and decrease in price, even while others do the opposite. Why? Developing technology can really reduce the costs of making something, sometimes enough that the price declines, even as the value of money goes down.

The federal reserve aims for an inflation rate of 2%. But that’s a number with very little meaning to most people. We care more about how much the grocery bill will increase by. For that, we look at the consumer price index. Calculating how much the value of money has changed is as simple as having two reference points. Pick an item. What does it cost today? What did it cost back then? Do a little subtraction, and then a little division.

Of course, you could also use the CPI inflation calculator provided by the government. In that case, it told me that a 100$ in 1920 had the same purchasing power as $1,342.65 in 2020.

Why do we care about inflation? Sure, groceries cost more, gas costs more, electricity costs more, but we’re earning more too, right? Eventually, probably. What’s really concerning is when inflation is high, when you see the kind of chance the US dollar had from 1920 to 2020 over the course of a year. Wages just can’t keep up.

Literally printing more money, while the obvious (and easiest) means of causing inflation, isn’t the only way to go about it, but the alternatives are a bit complex for this summary.