There lurks a thief in the night, prowling the land, he predates on the poor. Robinhood’s evil and twisted twin, he siphons wealth from the “have nots” and gives it to the “haves”. The name of this unseen, nefarious and creature, is inflation.
What is this beast and where does it come from? Most of all, who benefits from this robbery? Scant are the political saviors that speak of slaying this beast. Together we will shed light into the dark.
Inflation is one of those dry economic words that causes the listener immediate boredom and no interest. Unknowingly, we are conditioned from an early age to shutdown anytime that its pronunciation courses our ears. However, inflation refers to nothing more than an increase in prices, something that impacts us all.
When you arrive at the grocery store to find that the price of meat has gone up by $.24 per pound, the price of milk has gone up by $.22, and the eggs have increased by $.37, this is inflation. Slowly, as prices steadily rise, inflation erodes at your wallet’s purchasing power.
We are led to believe that it is only natural for prices to keep going up over time. No explanation is ever provided, we just come to accept it, “this is just the way it is.” There is nothing normal about this upward trajectory of prices, as markets become more efficient, goods actually become less expensive over time. The real reason that prices steadily increase over time is because of inflation, but what causes inflation? We understand the problem, but what is the engine driving this secret tax?
Inflation is a gradual rise in prices, caused from money’s loss of purchasing power. Prices are the trading ratio between goods and money. For example, imagine that the average price of a gallon of milk is $4. In the same way that four dollars can buy one gallon of milk, we can also say that one gallon of milk can buy four dollars. This relationship goes two ways. If the supply of milk or the supply of dollars changes, the price will change.
Imagine for a moment that a new technology was developed, leading to more milk production, thus doubling the supply of milk. At the same time, the supply of dollars remains the same. Now the number of gallons of milk “chasing” dollars has doubled, causing the price to be reduced, approximately from $4 to $2.
Now let’s examine the opposite case. Instead of the supply of milk doubling, now let’s double the number of dollars. In turn, there are now two times the number dollars “chasing” the same number of gallons of milk. The price, in this case, would double from $4 to $8.
In part 2 we will examine the impact that inflation has on society, more specifically, who it impacts the most. We will explore how this secret tax affects poverty.