(Approximate reading length: 8 minutes)
A lot of people realize an increase in price of a product they have purchased before. These increases can be on a larger area as well as a smaller one. On the other hand, for example, you might have seen a discount on older model laptops’ prices when a new one comes out. We use inflation concepts to explain these phenomenons. We will try to explain inflation and its concepts in this article.
A majority of people think that inflation is necessary for the economy, but they also think that it is going to be damaging if it increases too much. But what exactly is this inflation we are talking about?
What is Inflation?
Inflation can be defined briefly as a general increase in prices of goods and services.
In the chart below, Turkey’s inflation for each year has been provided.
The analysis of the chart above is crucial; but first, let us take a look at the concepts CPI and PPI.
CPI (Consumer Price Index)
It represents the increase in price of goods and services the consumers pay for. A basket of common goods and services are taken as the subject, and the increase in percentage of the prices of these goods is calculated. These common goods and services include furniture, clothing, shoes, education etc.
It is one of the most common tools used for calculating inflation.
PPI (Producer Price Index)
It represents the increase of prices of goods or services used in production, in a given period of time.
After giving brief descriptions of these concepts, we can move onto analysing the chart above.
Analysing Chart 1
As we can observe in the chart, in the past 2-3 years, both CPI and PPI have been in a tendency to increase. Possible consequences include a decrease in both consumers’ number of purchases and the supply of the producers. Ultimately, we can expect stagnation in the economy. Especially for producers, since they will struggle to sell their goods and services, they might step out of production and invest their money in real estate or interest.
Reasons for Inflation
There are reasons why inflation increases. So let us take a look at them.
- Demand Deficiency Effect
If the aggregate demand is more than the aggregate supply, this effect will occur. Products will be sold to the consumers for higher prices. Moreover, production may not meet this demand, and consequently supply will not meet demand. Inflation may increase for this reason. Also, if money demand increases, the consumer demand will increase likewise. Consequently, supply will not meet demand, and we can expect a similar increase in inflation.
- Cost Push Effect
Cost Push effect is caused by an increase of price of any goods or services used during production. For example, an increase in labour price will reflect to the price of the finished product. That is how Cost Push effect causes inflation.
Are there any upsides to Inflation at all?
Inflation being beneficial or not has been a hot debate topic for years. Some claim it is beneficial, others claim that it is not. So let us try to understand both of these perspectives.
According to the first perspective, inflation is beneficial because controlled inflation may cause growth in economy. Since more money will be flowing into the market, demand will increase, motivate production, and cause new branches of professions to be found. Another effect might be caused by inflation, as Keynes suggests, is protection against Paradox of Thrift. This paradox suggests that the demanders will purchase the products early since they are expecting an increase of prices of the said products. Keynes suggests that inflation will protect us from this phenomenon.
A second perspective suggests that inflation will give birth to negative consequences.
For example, when inflation increases, lower and middle income classes are the ones who are the most effected. Because their real income will decrease since the money’s purchasing power is getting weaker. Moreover, an increase in inflation may also cause and increase in interest rates. Since someone who wants to protect their money- whose purchasing power is decreasing, will invest it into interest. Another consequence may be inflation decreasing the amount of savings.
A New Era: Crypto Currencies and Inflation
A new era has begun. A lot of states have decided to invest into crypto currencies in order to protect from the effects of inflation. However, Bitcoin’s limited supply makes this difficult. This might cause monopolization of Bitcoin. Despite this, there are a number of nations who view this positively. Venezuela, who is battling high rates of inflation, is one of these nations. In fact they have created their own crypto currency, Petro. On the other hand nations with high inflation rates such as Japan, Latvia, Switzerland, and Germany have embraced the Bitcoin crypto currency.
You can find our detailed article on crypto currencies, here.
Reputable Individuals on Inflation
Former US president Ronald Reagan: Inflation is as intimidating as a robber with a gun, and as deadly as a hitman.
American author and journalist Ernest Hemingway: There are two solutions for a nation that is lead wrongly: inflation or war. Both of these will provide comfort for a short period of time, but both of them will bring havoc afterwards. However, both of these are temporary ports for opportunists, both politically and economically.
Author Amit Kalantri: Starting a job today is cheaper than starting tomorrow.
Former US president Herbert Hoover: We have gold because we do not trust governments.
Interest free economy activist, author, and architect Margrit Kennedy: When interest ceases to exist, inflation will mean nothing.
Stanford University economist Thomas Sowell: Without increasing the taxes, the easiest way to relieve people of their wealth is inflation. Inflation is the most universal tax of all.
Nobel Prize recipient economist Milton Friedman: Inflation is the only tax that can be forced upon us without any legislation conditions.
Former president of US Federal Reserve Ben Bernanke: Inflation, when kept low and steady, will bring a lot of benefits to a lot of nations.
Early Bitcoin investor Roger Ver: If the world manages to embrace Bitcoin, inflation as an economic and political tool will be taken away from governments.
Author of Rich Dad Poor Dad, Robert Kiyosaki: Nowadays, people are both panicking about inflation, and buying expensive homes and shiny cars.
Author of The Roots of Stagflation, and economist Edgar Fiedler: Unfortunately, protection against inflation is impossible without taking risks.
Journalist and TV host Nick Clooney: In 1920’s Germany, failure of banks and the increase of inflation destroyed the middle class, and directly caused the rise of Nazis.
Former member of US House of Representatives Tim Bishop: The real purpose behind inflation being low is international trade.