Inflation Measurement and Adjustment

Finance allah shmoop shmoop what is inflation and how does

it work This is inflation and this is inflation and

this is infiltration but really isn't relevant So get that

out of here okay The kind of inflation were referring

to is the kind where money gets more prolific so

that prices that have stayed steady well feel cheaper All

right now what the fuck does that mean Well when

economies are good and everyone is working getting paid able

to save money and buy themselves luxuries like ah waffle

maker that injects maple syrup directly into the waffle While

people tend to be willing to pay more to get

stuff they'll pay two hundred dollars a person for a

one day pass to disneyland They'll buy a second car

a flashy one that gets terrible mileage but will impress

the neighbors They'll buy this thing whatever it is because

it is heart Why not there's more money to go

around Products want to increase in price Ah home in

eighteen eighty and central california might have cost a thousand

bucks that same home today Well it's been remodeled a

couple times but it might cost a quarter million dollars

Or more but annual wage or salary in eighteen eighty

Might have been two hundred dollars So that house cost

five years Wages gruel forward to today in an average

wage is fifty grand And voila Well that home also

costs about five years Wages was their inflation Oh yeah

Big time Was there really cost increase in the house

will know you had to work the same amount in

eighteen Eighty is he do today to buy the same

house All right So why do people want inflation Like

why did money have to go up so much When

five yearswork buys the same today as it did one

hundred fifty years ago Psychology mohr is more which means

better So people simply like having a bigger number Over

time it comforts them to think that they're actually gaining

traction in the financial creek in which they are paddling

Perhaps more importantly governments want inflation Why Because they borrowed

tons and tons and tons of money But most of

the money the governments have borrowed is in fixed terms

or steady interest rate numbers That is the government agrees

to sell fifty billion dollars worth of debt at two

And a half percent interest We exist in a given

time period at a rate of two point five percent

inflation calculated as the existing costs of a basket of

stuff that people buy You know like milk paper towels

a six pack of bundy's dog treats heartburn medication that

waffle thing And so on Those and many other prices

air checked in dozens of stores averaged and totaled And

a gross number comes out each year In this case

the total basket of goods assessing inflation last year might

have been well let's say a hundred grand for simplicity's

sake This year that same total is one hundred two

thousand five hundred dollars that's How we got that two

point five percent annual inflation rate Okay so now there's

a shock to the system A bomb goes off in

a mini war start The economy booms his government's by

all kinds of us products In an effort to you

know kill one another The bomb making factories pay a

lot of overtime Toe workers who spend more save more

and inflation starts to happen all of a sudden that

carton of milk which used to be three boxes now

four bucks and everything else moves the same direction So

we go from a steady hundred year average rate of

about two and a half percent a year to now

suddenly a seven percent inflationary environment and that last for

five years before regressing to the mean of two and

a half percent So we have five years come Found

it at a four and a half percent increase in

inflation It quote made money cheaper unquote As for that

fifty billion bucks the government borrowed it still has to

pay the two and a half percent of your interest

on lee now it's relatively way cheaper to pay back

that loan You can imagine the case that brazil had

in desperately trying to pay back its loans many times

in the asked by inflating its currency i eat making

the federal borrowing rate from its treasury super cheap like

one percent or less It made borrowing easy for businesses

and individuals and in the process drove very high inflation

rate it's almost twenty percent a year on average for

a sustained period of time This means that the real

cost of debt drops by about fifty percent every three

And a half years or so and that the people

who loaned the brazilians money were very very p oed

might seem like inflation then it's just a dandy thing

to have It makes loans cheaper It lets everyone pay

off their bills quicker easier better The problem is that

what happens next time A government wants to borrow money

and they have a track record of letting inflation spiral

out of control Lenders just go away How deflating hey