Inflation Question?

Question

1) What is inflation?

2) when people say its the cost of rising prices, well how does this all come about (from the roots)?

3) I maybe confused but somewhere ive read/heard that inflation increases when more money is printed, can someone please explain this, as I dont understand it, and dont understand how increasing the more notes in circulation would increase the price of a loaf of bread?

Please could you offer websites (ideally with direct links) that could help explain the above.

Thank you x

Answer 1

Inflation's meaning is all in the word. If money has a certain amount of stored value in it and more money is introduced into the economy, then the total value behind all of the money in circulation needs to be spread out meaning each individual unit of currency loses some of its value from before.

So let's say we're on an island and we use sanddollars for money and lets say money's value is determined by the amount of coconuts we have. If only one sanddollar is in circulation and 100 coconuts are stored, then that sanddollar is backed by (and worth) 100 coconuts.

Now lets say we introduce a second sanddollar into circulation. Each sanddollar is now worth only half as much, 50 coconuts. If we introduce a third, each is worth 33.33 coconuts; a fourth, 25 coconuts; and so on.

As you see, inflation can become a big problem when currency is strong, but weak currency is affected so much.

Lets say we have 100 sanddollars in circulation meaning each is worth one coconut. If we introduce another into circulation, each sanddollar loses much less value since their worth reduces to .9909 coconuts each. If you were to go to the coconut store and buy a coconut with a sanddollar after another was introduced, the storekeeper wouldn't fret because the difference in value is less than a percent of a coconut.

But who has the right to introduce more sanddollars? Usually, it's only the government since the government has authority granted to it by the people. The government is entrusted to pay off its debts and have a steady budget, so in order to do so, it can introduce more money.

Today's economy has a lot more money in it and isn't just affected by printing of money for inflation (companies jack up prices to make more money and gain greater profits for more economic power) so we aren't as sensitive to inflation as in the example. Still, there are countries that are in cases similar to the example especially in Latin America and sub-saharan Africa where governments are very poor and the corrupt manage the country's finances. Some of these countries suffer from inflation of 1000% or greater annually (every year money is worth 10% of what it was the year before as if we had introduced 10 sanddollars while only having one coconut in our example).

With regards to inflation, rising prices means the money your making doesn't have as much purchasing power as before. If the amount of value behind the money in an economy (i.e. coconuts) doesn't grow faster than the rate at which goods are valued at more sanddollars, then prices are inflating. Let's say you have 10 sanddollars and you wanna buy a banana which is valued at 2 sanddollars. You decide you don't really want it today and wait till tomorrow, but tomorrow, the banana is valued at 3 sanddollars while no more coconuts have been collected. Effectively, your money has lost power because the cost of bananas has increased while the backing of your money has not.

Here's another site that can help clarify inflation for you:

Answer 2

Inflation is how much the price of certain specified goods have increased over a year. The basket of goods considered is usually a cross mix of items bought by a lot of people. If a Nation has inflation and only prints money to cover the cost, the prices will rise faster because there is more money in circulation and more people are spending it pushing up market prices.

Answer 3

In simple terms inflation is when prices are running away and you have no contol. A control is then put in place by curbing your spending. This is reflected by an increase in interest rates. By increasing interest rates you are paying obviously more say, for a mortgage, car purchase and so on...the more demand for an item the more expensive it will be.. we all want things now. We british are heavily in debt because we are encouraged to buy ie. we are offered credit cards plus more credit creating more debt!(this answers questions 1&2).

Question 3 relates to the RPI(the retail rice index) Every so often the main foods are purchased and compared with what they cost say, a year ago. Foods would include bread, milk, eggs, butter. potatoes, etc., These may have gone up and the comparison shows what percentage they have risen, and bases any increase on this indicating how much the cost of living has gone up by.

The printing of money is required because we need more money to spend on things as the prices go up. Also money old notes need replacing..hope this helps!

Answer 4

Inflation is defined as an increase in the general price level. It doesn't mean the prices of everything are going up. It mean prices in general. It can come about from various sources and even when we witness it, the experts will disagree about the source. We do not "print" money. It can happen when the money supply increases, the faucets of cash and credit are opened too widely. When the Federal reserve buys government securities(bonds) on the open market it pays for these bonds and these payments inject more money into the economy. They can also have banks keep less funds as reserves, which allows banks to lend out more money and this "creates" economic activity or money that moves from hands to hands and place to place. I wish I had more time to walk you through these transactions, its amazing how one loan can cause a ripple effect of activity in the economy. When the economy heats up like this, then inflation shows up and we have to take steps to cool the economy down. And so on and so on...

Answer 5

Inflation is about money. Money rules the world and the world tells you one thing when in actuality the whole picture really is presented to us differently than what is. Inflation means that, as you are informed, prices go up, they never go down and if they do it is only for a while to make it look good, when everything is not good, everything is fixed, like rigged, like it will only go one way, POLITICS, POLITICIANS are running this planet. I'm a realist. So are you but there are constant and continual distractions to keep you from focusing on the real, reality in its actuality. Inflation defines greed, wealth, corruption and power. Money is what makes the world go round, and money is what causes a lot of people to lose their psychological balance. People do a lot of mean things for money, and in fact inflation plays a large role in profits, and profits go up, thus, you get continual inflation leading to a gradual steady ongoing problem, who foots the bill? It doesn't matter because whoever foots the bill, whoever is going to change the course of inflation to deflation will not happen in our life. Thank you.

Answer 6

Inflation, to sum it up, is the rise in the cost of living over a period, eg: a month. What usually happens is people get more money, they spend more, the market prices for things rise (because they can as people are buying them) and hence, you have inflation! Hope that's easy for you to understand!

Answer 7

A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

Answer 8

INFLATION in not rising prices. It causes rising prices. You are correct in your assumption that it is an increase in the money supply. This occurs when government prints money, and as the person above mentioned, thereis as a result too much money chasing too few goods.

If you want to know the origin, nature, history, and insidiousness of inflation, go to . ..

Answer 9

Inflation is, quite simply: Too much money chasing too few goods.

You are doing a car boot sale. You have one hundred items for sale, all priced at £1. (total 'value' £100)

One hundred and ten (110) people are prepared to offer you £1.00 each, for each item. ... Your items appear to have attracted a new price of £110!

You experience 10% inflation: you are oversubscribed, by ten willing buyers. (Your price, should be £1.10)

So, your price increases, to £1.10!

So now, 100 buyers pay you £1.10 each. (Your £100 of items has earned £110 of income)

Inflation = Too much money chasing too few goods.

It is as simple as that!

(forget governments and 'the State' : They have an entirely different agenda. It revolves, largely, around salaries for people who work for the State).

Just think economics!

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Answer 10

inflation is the price of human greed.when demand exceeds supply prices rise because people are prepared to pay more to have what they desire.The opposite senario is deflation when supply exceeds demand which can lead to economic collapse with its knock on effect.