Causes of Inflation

dollars losing vavueWe’ve heard stories of how back in the day you could have the world for a hundred dollars and get back change. So what happens to those times. Why do prices continue to rise? Why is it that we can no longer go out with 50 cents in our pockets and buy a pair of slacks, or knickers? Why do penny loafers seem so silly now? Have they always been silly? Actually, to answer my own penny loafer question, I mean as the net answers that. Apparently in the 1940s and 50s, men would slip a dime, which was the price of a payphone call, into their shoe pocket. The style was later changed to the shiny penny for style.[i] Now, I think a phone call in Toronto is 50 cents. Bell’s applying to make it a dollar the last I heard.[ii] Loonie[iii], Twonie Loafers? Dollar bill loafers?

 

 

As we understand it, price inflation is an unavoidable result of how FIAT economies work. The idea behind its workings is fairly easy to understand.

 

Bob the bullfighter is making $10 an. He’s fairly happy. His bills are being paid, and he has a little to put away for a rainy day. Being that Bob is making $10 an hour, he also notices what he can’t get for that price. Those tight bullfighter pants with the gold trim are a little out of his price range. He’d like to step up his showmanship to stay relevant. $10 an hour doesn’t seem satisfying as the day he got the raise anymore, so he asks for a new raise. Since he’s been at $10 an hour for a few years, the boss says “cool!” now he’s making $12.

 

Since bullfighters are a tightknit group, the others find out, and put pressure on their bosses. Suddenly, the gold trimmed pants are flying off the shelves. The dealers push the prices up, to take advantage of the demand since supplies are short. They continue to push the prices until the demand is more in line with the number available. The higher price now becomes the new equilibrium.

tiny money

Then, things calm down. A year or so later, one of Bob’s bullfighter friends gets a raise. He asks for one himself and gets it, and the whole thing starts again, pulling prices up o meet the demands of the extra money out in the economy. This is known demand-pull,[iv] since the cost is being pulled up by the insatiable demand for those pants.

 

There’s also the argument that the economy is pushed by cost (cost-push).  Here, the gold trim pants somehow become more costly to produce, so the factory must raise the price, as does the retailer. Higher prices of those important goods cause workers to demand higher wages to keep up with the cost of living. Since the cost of things is what pushed up the price here, this is called cost-push inflation. It’s a bit of a chicken and egg question. By the way, if anyone has an answer to the chicken and egg question, let me know.

 

Now, in an economy where the money supply wasn’t controlled, there would also be times of deflation, where prices, and wages would fall as well. At some point, there would be times where people were not willing to buy as many things. When the demand dropped, prices would start to fall. Wages would also fall in order to stay competitive, and to compensate for selling goods and services at a lower price.

 

The money supply is set to increase in a way as to have a certain amount of annual inflation. In Canada it’s between 1 and 3% a year,[v] and around 2% inflation each year in the. This is partially accomplished by increasing the money supply, as well as by changing interest rates. Therefore the option for the economy to slide backwards has essentially been curbed. We can only go up in prices.

 

Money continually loses value. This is useful to people who borrow money, since what they pay back is worth less than what they borrowed, even though the number has stayed the same or increased. It does not favor people on fixed incomes, since the money in the savings account or the mattress continually loses value.

 

Since I’ve only ever experienced this type of economic structure, I’m not sure what it would be like if people were operating the economy on their own, in their natural habitat. How would humans in their natural habitat respond to an economy not being controlled by a central source? Would it be chaos? Magic? Maybe it would be the same, but the numbers would be different. Who knows?

 

Phone calls were a quarter when I was a kid. They were that price for most of my life. The last time I tried to use one it was 50 cents. I remember that because I was at the airport, with a 20 dollar bill, about to buy a chocolate bar which was like three dollars (but used to be $1), just to get change for the phone. It feels like we’re losing something, but things are guaranteed to change, we expect them to.

 

By the way, when I was about to buy that chocolate bar, a stranger offered to let me use his cell phone to call my ride. So, the world hasn’t spun out yet. I just have to remember to keep that loonie in my Loonie Loafers.

 

Tahric Finn



[i] Delaney, Cameron. (n.d.). “The History of Penny Loafers.” Ehow style. Retrieved March 14,  2013, from http://www.ehow.com/about_5056990_history-penny-loafers.html.

[ii] CP. Sept 13, 2012. “Pay phones too expensive? Call someone who cares.” Macleans. Retrieved March 14, 2013, from http://www2.macleans.ca/2012/09/13/heres-a-loonie-call-someone-who-cares/.

[iii] Loonie, Dictionary.com. Retrieved March 14, 2013, from http://www.bankofcanada.ca/monetary-policy-introduction/inflation/

[iv] “Demand-Pull Inflation.” Investopedia, Retrieved March 14, 2013, from http://www.investopedia.com/terms/d/demandpullinflation.asp#axzz2NFcvTqpk.

[v] “Inflation.” Bank of Canada. Retrieved March 14, 2013, from http://www.bankofcanada.ca/monetary-policy-introduction/inflation/.

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