What is inflation?
Inflation refers to increase of price of goods over a period of time. For example, more money will be required to purchase same amount of goods next year as compared to this year.
I have divided the blog post in two sections:
- First I will explain the reasons that government gives for explaining price rise.
- Then I will give you the real reason that government hides as to why the prices rise year on year.
What causes inflation - according to governments
Cost push inflation
Several raw materials are required to make any finished product.
The producer has to buy raw materials from others to assemble the final product – pencil. He prices the pencil such that he is able to make a profit.
The producer will have to increase the price of the pencil if price of one or more raw materials increases to continue to make a profit.
A common example of cost-push inflation is everything becoming expensive when cost of diesel required for transportation of goods becomes expensive.
The argument is valid for a shorter duration for a specific product but not for increase in prices year after year. Governments use this argument but does not explain:
- Why cost of raw materials increased in the first place?
- Why do prices of all other goods not affected by that raw material increase?
- Why the prices do not go back to normal ever after once the issue causing lack of supply of the raw material gets resolved?
Demand pull inflation
This type of inflation occurs when there are large number of buyers and shortage of products.
This happened in 2019 during the COVID pandemic when everyone started hoarding everyday stuff and factories were forced to shut down.
This is also a temporary form of inflation as companies ramp up their production seeing demand for their products to make more money. This demand also attracts new entrepreneurs as an opportunity to make money.
This form of inflation cannot justify rise of prices year after year for all goods even when the demand of product dies down.
Some economists and politicians believe that suddenly all the corporations become greedy at the same time and have increased prices.
It is possible that there is consolidation in a particular product industry and a single corporation can control price of a particular product.
However, it is not possible for any particular corporation to increase prices of all the goods in all the countries every year.
Supply side disruptions
Then there are other experts that believe that inflation is being caused because ships are congesting the ports.
Yes, the reasons keep getting weirder. But that is what governments have to do to hide reality.
What causes inflation - real reasons
Make no mistake long-term inflation is caused because of one and only one reason – governments printing money.
The prices of products increase not because they have become more valuable, but because the currency loses its value as governments print more and more of it.
Venezuela is an extreme example of hyperinflation caused because of reckless money printing by the government.
All the other countries are also increasing their money supply but not as fast as Venezuela. Hence inflation in most countries is not as bad as Venezuela but it is there none the less.
There are several ways that government uses to increase the money supply.
Central bank of a country has the power to print money.
The central bank buys worthless shit like government debt, bails out bankrupt corporations, and purchases stocks to increase their prices.
Basically, they buy the stuff that no other sensible investor will buy at such prices.
But unlike investors who have to do due deliberations before making an investment, central banks can throw money at anything because they have the printing press.
Artificial low intrest rates
Most of the central banks have lowered the intrest rate to almost 0 so that government and friends who have borrowed the money do not have to undergo the hardship of paying the intrest.
Governments are incentivized to hide the real reason for inflation from their population so that they can keep abusing the power of money printer for as long as possible.
They will complicate the basic stuff with corrupt and incompetent economists who go on sold-out TV news channels and use complex jargon to confuse the population.