Oh, Grandma. You say I’m so rich with my salary. But you haven’t left your house in forty years and don’t do your own shopping. Milk used to be a nickel; now it’s three dollars. A burger used to be a dime; now they’re six dollars. Plus you didn’t even have student loans to pay, and you owned a house at my age. I’m not rich. Inflation, Grammy. Inflation!
Price inflation is when the prices of goods and services rise, often expressed as baskets of goods per year. The Consumer Price Index has lots of baskets, like education, transportation, food—all the stuff most people buy regularly. It’s “inflation,” because incomes rise, too. When prices and income both rise together at the same rate, then buying-power stays relatively the same. This is what Grandma doesn’t understand. Tell her inflation is so important that the Federal Reserve uses it to set monetary policy. If inflation is too high, that’s dangerous...so banks will increase interest rates. If it’s low, then the Fed can lower interest rates. See, Grandma...see? Price inflation is real.
So what’s the point of inflation if everything stays the same-ish? Your income goes up, but if prices go up, then you’re back where you started anyway.
There are only theories to explain inflation, but one is that, as there’s more money pumped into the economic system from growth, it creates more dollars to buy more things. Which means there’s a higher supply of money than goods demanded, making prices rise, and incomes in turn.
Related or Semi-related Video
Finance: What is Disinflation?5 Views
finance a la shmoop what is disinflation disinflation often confused with dat
inflation refers to the decline in inflation rates over time in 1973
America was fully juiced with Warbucks from Vietnam inflation hovered around [soldiers firing weapons]
the mid going on high single digits and then higher from there like 7% or more
depending on where you look him and Jimmy Carter stepped in on this guy and [Carter walks into office]
raised the federal rates the Fed rates their massively stamping out the wild
bull economy and putting the brakes on inflation but it didn't happen until
after Carter was actually out of office and Reagan took over inflation [Reagan replaces Carter in office]
eventually had rocketed all the way up to about 14 ish percent on an annualized
basis looking at the monthlies in the 1980-81 period right here
well the crux of dis inflation is that inflation is still positive it's just
becoming well less positive and or like you know how you feel not long after you
say I do and the honeymoon is over and you have to take out the garbage so
under Carter the US inflation rates were attacked in a variety of ways the [Carter in a boxing ring]
biggest of which was to make the cost of renting capital very expensive which
cooled the economy but it took a long time like note how slowly inflation
rates came down and well really it was decades before things fully stabilized
you can see how things slowly disinflation the raging levels that
peaked at post-vietnam era 1314 percent then slid all the way down to a 1 to 3
percent way down there where it's hovered for a
while so that's disinflation still inflation but just less of it deflation [Disinflation deflating]
is when inflation turns negative like prices are actually declining and yes
we've had periods of deflation before albeit very short ones like in the post
mortgage crisis Mallove's in 2009 right here yes yes it's rare but it happens
got it okay class dismissed
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