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It’s a useful concept to understand. I went though most of my life kind of getting it, but not really. What I had were images of people paying for bread with wheelbarrows of money in Germany in the 1920s. Also, the realisation everything seems to have cost “less” before.

The fraction

Inflation is the rate at which prices increase. Stated in reverse, the rate at which how much you can get for a currency decreases. Let’s call the change in stuff divided by money X. Inflation is how X increases over time. If we’ve had 10 stuff and 10 money (X = 1) and today we have 10 stuff and 20 money (X = 0.5) we’ve undergone inflation. This relationship is the key.

We’re try to be a productive society and so there will be more stuff over time. If the amount of money stays the same while stuff increases we have deflation. That’s the opposite of inflation. We get more for the same amount of money. Why wouldn’t prices stay the same? Because when there is more of something it’s cheaper. If we want prices to be stable, and assume the amount of stuff will increase, the amount of money must increase with it.

The cause

You might have heard the term GDP (gross domestic product). That’s a fancier word for the “stuff” we’ve been taking about. We try to increase GDP but it’s not easy and a country is lucky to get a few percent a year. Alas, those reuslts barely make a difference. Controlling the amount of money we have is much simpler. If we stop printing more we’ve immediately eliminated inflation. That tells us that it’s the one printing the money who causes inflation: The government. Contrary to what some believe, trade unions, business and consumers are not to blame because they can’t print money. And it’s not a capitalist phenomenon either, it’s a monetary one. Like taxation, while being a world-wide phenomenon, it’s not an international one. There are 2 main reasons the government prints more money:

1. They want more money to spend.To be fair, the government doesn’t do this completely independently.The citizens put pressure on them by asking them to do things while not wanting them to raise taxes for it. Printing money is a sneakier form of taxation as it makes everyone’s money worth less. It’s a tax no one needs to vote for. The second way it’s sneaky is that with inflation you’ll eventually have more money, which can put you in a higher tax bracket. You won’t really be richer, but you’ll get taxed more.
2. To fix unemployment is a common reason for the government to spend more. To “stimulate the economy”, they say. But it’s only a temporary fix to pull money out of the air and give the unemployed because the consequences of inflation is coming for everyone.

The solution

Simple. The government should spend less and print less money. Now days it’s done though bookkeeping rather than physical printing of course. Just like the negative effects are delayed, so will the positive ones we do this. Just like there’s a false sense of plenty with inflation, we will need to see through the false sense of of diminished wealth when we stop inflation. People want their own prices to be high when everyone else prices are low but it’s impossible to make that happen for everyone. Your prices will go down, but don’t panic because everyone else will too. Don’t focus on the number going down, realise the value of your money is going up. There will be a period of relatively slow economic growth and unemplyment before the prices settle into the new normal.

Last updated 26 May, 2020

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