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SQUEEKY2's avatar

In its simplest form what is the true reason for inflation?

Asked by SQUEEKY2 (19165points) September 29th, 2019

Is it the working man wanting more for them and their families, or is it corporate greed wanting higher and higher profit margins?
Or does the blame fall on governments with their never ending taxation?

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35 Answers

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kritiper's avatar

Bob needs more money, so his employer has to raise the price of his product to cover it. The people who buy that product have to raise their prices to get the money to pay for Bob’s employer’s more expensive product. And it goes on and on like this until everybody’s prices have gone up and now Bob needs another raise.

Tropical_Willie's avatar

Inflation also comes from raw material costing more (and tariffs).

ragingloli's avatar

Money supply increasing faster than the growing value of goods and services on the market.

LostInParadise's avatar

When there is near full employment, companies competing for workers have to offer higher wages, which increases the price of goods, which causes workers to demand even higher wages, and on and on.

Zaku's avatar

I think the simplest form of the cause is when people who can set prices for things increase those prices for whatever reason. That leads to other people eventually also increasing prices, either because of perceived need or desire.

YARNLADY's avatar

Credit cards cause inflation. They create fake money, in other words more buying power for consumers. This cheapens the value of money, causing sellers to charge more. It is a never ending process until failure sets in, like the aftermath of the housing bubble, (caused by people buying houses they couldn’t afford).

Caravanfan's avatar

Exactly what @ragingloli wrote.

elbanditoroso's avatar

There are two major reasons:

1) Supply and demand. When there is a low supply of something (think: gasoline or 100-year old scotch) the prices go up. A couple weeks ago Iran bombed the Saudi Arabian oil fields. There was worry about whether supply would be affected. (it was, briefly) and as a result prices of gas went up by 30 cents/gallon. If that had continued for a long time, the cost of gas, is used by almost everyone – would have hit the prices of of anything and everything else. And inflation would have been ignited.

2) too much cash in the economy and too little to purchase Too much cash, itself, is not a real problem. As long as the cash is being used productively for investment in productivity gains and manufacturing. Too much money, not being used, tends to allow prices to go up to meet the supply of cash.

YARNLADY's avatar

@Caravanfan I don’t see any mention of credit cards or fake money in the above answer.

Zaku's avatar

@elbanditoroso It seems to me your points also assume:

3) People who will increase prices just because someone will buy their things for more. I realize conventional economics assumes that’s a ubiquitous behavior, but not everyone does that, and if few or no people did that, it seems to me there would tend to be much less inflation.

elbanditoroso's avatar

@Zaku yes, I agree. I think that tends to be the case more often that not.

ARE_you_kidding_me's avatar

Fractional reserve banking causes it as does demand for goods outpacing supply.

Pinguidchance's avatar

In its simplest form what is the true reason for inflation?

Desire.

Tropical_Willie's avatar

Credit cards and medical expenses cause bankruptcies. @YARNLADY

Not inflation (in economics 101 I learned that)

Yellowdog's avatar

I keep taking money out of the system, so prices rise globally to make up for it.

zenvelo's avatar

None of you “causes” @SQUEEKY2 cause inflation.

Inflation is caused by too much money chasing too few goods. The money supply is not in and of itself inlfationary if the velocity of money is kept under control.

MV=PQ, where M= money, V=velocity, P=prices, Q= quantity of goods and services.

Disrupt the money supply or the velocity of money, and it disrupts Prices and production.

Dutchess_lll's avatar

How does one disrupt the money “supply”?

zenvelo's avatar

@Dutchess_lll There are many ways to disrupt the money supply: Some are inflationary, some are deflationary.

1. Stop printing any new money.
2. Print twice as much money
3. Put a “hold” on money transfers between banks
4. Put a cap on processing of demand deposits (checking accounts) (i.e., no more than $1,000 per check, no more than $10,000 per day, without prior arrangement)

seawulf575's avatar

in its simplest form, Greed is the true reason for inflation.

Dutchess_lll's avatar

But why would anyone do that @zenvelo?

LostInParadise's avatar

Here is an informative article on the subject, from which I confess I learned quite a bit. The main point is that inflation occurs if there is either excess demand or insufficient supply.

zenvelo's avatar

@Dutchess_lll People usually don’t take those actions without deliberate intent to achieve some other policy reason. Government has’t taken in enough tax revenue? Print more currency and pay the government bills. Inflation running rampant? Slow down money transfers and stop printing money. Need food and staples for the military? Take control of commodities, watch the prices rise on what is available for the public.

Caravanfan's avatar

@Dutchess_lll The Federal Reserve has control of monetary policy in the US. When they want to get a hold of inflation they will raise interest rates and decrease printing money to make the money supply more scarce and more expensive. In times of recession they will put more money in circulation and lower interest rates making the purchase of money cheaper and easier.

On the other side, Congress has control over the fiscal policy. They will levy taxes which are a drag on the economy, and they will decide where to spend money. This can have an indirect effect on inflation as well, but only insofar as affecting where people spend their money. If people have less money in their pocket to spend, then they won’t buy as much.

Dutchess_lll's avatar

It sounds insane!

Caravanfan's avatar

@Dutchess_lll Actually, it’s not. The fact that we are no longer tied to the gold standard gives the Fed flexibility to adjust monetary policy relatively quickly.
https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093

Dutchess_lll's avatar

But what actually backs the cash money up now?

zenvelo's avatar

@Dutchess_lll The full faith and credit of the United Staes.

kritiper's avatar

Since we had to go off the gold standard, what @zenvelo said is exactly right. There is no other way.

Dutchess_lll's avatar

I heard there is no more gold in Ft. Knox. WHERE DID IT GO???

zenvelo's avatar

@Dutchess_lll Fake News, there are 147 million ounces of gold at Ft Knox.

Dutchess_lll's avatar

Oh I heard that over a decade ago.
But what is the point of having gold in Ft. Knox if it isn’t backing up the currency.

Zaku's avatar

So Trump can have his Mount Rushmore head coated in it.

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