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inflation

Inflation

(Topics: The Economy | Back to Home)

Something happens when you become an adult. You realize that stuff is more expensive than it used to be.

This is an economic concept called inflation, and it's something we all have to know about. Inflation means that the total size of the economy is getting bigger faster than our ability to keep up. So we have to spend more money on the same purchases.

Think of the economy as an enormous factory that we're all trying to run around to keep up with. If we can't keep up, the economy is inflating. If we're waiting around on the factory for stuff to do, the economy is deflating.

Deflation is a bad time for everyone, so to keep us safe the government tries to nudge the factory so we have a very low, very predictable rate of inflation (2%.)

Inflation also encourages people to participate in the economy. You could withdraw your paycheck in cash and put some in your mattress every month. But if you did that for 50 years, the money you saved wouldn't be worth much. Instead, the economy works if we're all investing in it through buying and selling.

Especially if we have a good mix of short-term purchases (such as lunch) and long-term purchases (such as mutual funds.)

Keeping the inflation rate under control is an essential function of government because only the government can control monetary policy. And no entity but the government has power to cause damage to the country through accidental policies that cause runaway inflation (or deflation.)

Misinformation about Inflation

There are lots of examples of times and places where inflation got out of hand, and people want to blame U.S. political parties that have nothing to do with anything.

So yes, there was runaway inflation in Germany, Zimbabwe, Venezuela, Brazil, Hungary, and other places. But each of these situations is different and was resolved in different ways (some better than others.) So it's not reasonable to warn that the U.S. could become one of them, because they are all quite different and none of those countries is very similar to America in the 21st century.


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