What is Inflation?

Summary

This video script delves into the perplexing nature of inflation, exploring its historical impact and modern management by governments. It outlines three primary causes of inflation: cost-push, demand-pull, and money-printing, each with its own economic implications. The script examines the potential for inflation to stimulate growth, as posited by Keynes, while also highlighting the risks and the monetarist counterargument. It concludes by reflecting on the inherent instability of inflation, likening it to uncontrollable forces such as weather, and the importance of prudent financial planning.

Takeaways

• 📈 Inflation is the persistent rise in the general price level of goods and services over time.
• 💷 Historically, the value of money has significantly changed; for example, Mr. Darcy's substantial income in 1813 is less than a starting salary of a primary school teacher today.
• 💰 There is an ongoing debate about what constitutes a well-off income, with the script suggesting that £20 a week is sufficient in the present context.
• 🎟 The cost of everyday items, such as a cinema ticket, has risen dramatically over the decades, indicating the impact of inflation on consumer prices.
• 🔍 Governments meticulously track inflation rates, using extensive data to ensure they can accurately report on economic trends and changes.
• 📊 Inflation concerns have evolved over time; the 17th-century Spanish Empire's collapse due to unchecked inflation highlights the importance of monitoring and managing inflation.
• 🛍️ Cost-Push Inflation occurs when businesses pass increased costs, such as raw materials, labor, or land rents, onto consumers by raising prices.
• 📈 Demand-Pull Inflation happens when the desire for goods outpaces supply, often triggered by increased disposable income from tax cuts or lower interest rates.
• 💵 Governments can cause inflation by printing more money or increasing the money supply, which can initially stimulate the economy but eventually leads to a decrease in the value of currency.
• 🔄 There is a potential 'window of opportunity' where an increase in money supply can temporarily boost the economy before inflation sets in, as described by Keynesian economists.
• 🚫 Monetarists argue against Keynesian approaches, insisting that any increase in inflation is detrimental and should be avoided.
• 💔 Inflation is particularly problematic for savings, as it erodes the purchasing power of money over time, discouraging the prudent practice of saving.
• 🌐 Inflation reflects the instability and unpredictability of the economy, influenced by a myriad of factors such as material costs, labor costs, productivity, taxes, and global economic conditions.

Q & A

Why do prices for goods and services keep rising over time?

Prices rise due to inflation, which can be caused by various factors such as cost-push inflation, demand inflation, and government money printing.

What was Mr. Darcy's annual income in the novel 'Pride and Prejudice' set in 1813?

Mr. Darcy's annual income was 10,000 pounds, which would be less than half of what a primary school teacher earns today.

How has the price of a cinema ticket changed from 1970 to the present day?

In 1970, a cinema ticket cost 30 pence, whereas today it costs around 13 pounds, illustrating the effect of inflation over the years.

Why do governments track inflation so closely?

Governments track inflation to ensure economic stability and to manage it effectively, as it impacts the cost of living and the value of currency.

What are the three main reasons for inflation according to the script?

The three main reasons for inflation are cost-push inflation, demand inflation, and government money printing.

What is cost-push inflation and what causes it?

Cost-push inflation occurs when the costs to businesses rise and are then passed on to customers, often due to increases in raw materials, labor costs, or land rents.

How does demand inflation arise?

Demand inflation arises when the number of people wanting a product increases faster than the supply, often due to people having more money to spend or lower interest rates.

What is the economic rationale behind governments printing more money?

Governments print more money to stimulate the economy, create jobs, and increase the money supply, although this can lead to inflation if not managed properly.

Why might inflation be considered a problem for savings?

Inflation is a problem for savings because it erodes the purchasing power of money over time, making it less valuable and reducing the real value of savings.

What is the historical example given in the script to illustrate the extreme effects of inflation?

The script mentions Hungary in 1941, where inflation reached 150,000 percent each day, making money saved quickly lose its value.

How does inflation reflect the instability of the world and life itself?

Inflation reflects instability because it is influenced by a complex and unpredictable mix of factors such as material costs, labor costs, productivity, taxes, exchange rates, and economic growth.

What is the Keynesian view on the potential benefits of a bit of inflation?

The Keynesian view suggests that a bit of inflation can stimulate the economy, allowing for increased consumption, hiring, and investment, leading to economic growth before inflation erodes the gains.

What is the Monetarist perspective on inflation?

Monetarists believe that any increase in inflation is problematic and should be avoided at all costs, focusing on the importance of price stability for economic health.

Outlines

00:00

📈 Understanding Inflation Dynamics

This paragraph delves into the perplexing nature of inflation and its historical context. It references the disparity between past and present incomes, using Mr. Darcy's wealth in 'Pride and Prejudice' as a benchmark. The script discusses the government's meticulous tracking of inflation rates and the historical oversight that led to the Spanish Empire's downfall due to unchecked inflation. It outlines three primary causes of inflation: cost-push inflation where businesses pass increased costs to consumers, demand inflation resulting from an increase in the number of people wanting goods that can't be supplied at the same rate, and inflation caused by the government printing money. The paragraph also touches on the Keynesian view that a controlled amount of inflation can stimulate economic growth, a perspective challenged by Monetarists.

05:03

💰 The Risks and Realities of Inflation

The second paragraph examines the risks associated with inflation, emphasizing the unpredictability and variability in the rate of price increases. It uses the extreme example of Hungary's hyperinflation in 1941 to illustrate the devastating effects on savings and the value of money. The script argues that inflation is problematic because it erodes the incentive to save, a virtuous trait, and rewards prudence by keeping inflation low, which aids in long-term financial planning. It concludes by reflecting on inflation as a reflection of the world's instability, acknowledging the difficulty in achieving and maintaining low inflation due to a myriad of uncontrollable factors such as material costs, labor costs, productivity, taxes, exchange rates, and economic growth both domestically and internationally.

Keywords

💡Inflation

Inflation refers to the general increase in prices of goods and services over time, which leads to a decrease in the purchasing power of money. In the video's context, it is a central theme, illustrating how historical figures like Mr. Darcy would have incomes that are now considered less significant due to inflation. The video also discusses how governments obsessively track inflation rates to manage economic stability.

💡Cost-Push Inflation

Cost-push inflation occurs when the costs to businesses increase and are passed on to consumers, leading to higher prices. The video explains this concept by giving examples such as the rising cost of raw materials, labor, and land rents, which businesses then compensate for by raising their product prices, affecting the overall economy.

💡Demand Inflation

Demand inflation happens when the number of people wanting a product increases, but the supply cannot keep up, causing prices to rise. The video script mentions that people getting richer and having more money to spend can lead to demand inflation, as can government actions like lowering taxes or reducing interest rates, which increase disposable income and spending.

💡Government Printing Money

The act of governments printing more money to stimulate the economy is discussed as a cause of inflation. While this can create jobs and boost the economy in the short term, it can also devalue the currency and lead to higher prices, as more money chases the same amount of goods.

💡John Maynard Keynes

John Maynard Keynes was an economist and philosopher whose ideas on economics are referenced in the video. Keynesian economics suggests that a window of opportunity exists where increased money supply can temporarily boost the economy before inflation sets in. The video contrasts this with the views of Monetarists, who oppose inflation at any cost.

💡Monetarists

Monetarists are economists who believe that inflation should be avoided at all costs, as it can have negative long-term effects on the economy. The video mentions them as critics of Keynesian economics, emphasizing the importance of controlling the money supply to prevent inflation.

💡Savings

Savings are funds set aside for future use and are an important aspect of personal finance. The video points out that inflation is detrimental to savings, as the value of money saved can decrease over time, making it less valuable in the future compared to when it was saved.

💡Purchasing Power

Purchasing power is the value of money in terms of the goods and services it can buy. The video script discusses how inflation erodes purchasing power, making the same amount of money buy fewer goods and services over time.

💡Economic Stability

Economic stability refers to a state where the economy is not subject to extreme fluctuations in growth, employment, and inflation. The video implies that controlling inflation is a key aspect of achieving economic stability, as it affects the predictability and reliability of the economy.

💡Wages

Wages are the compensation paid to employees for their work. The video script suggests that if wages increase at a rate higher than inflation, it can offset the negative effects of rising prices, allowing workers to maintain or improve their standard of living.

💡Economic Growth

Economic growth is the increase in the production of goods and services in an economy over a period of time. The video discusses the idea that a moderate level of inflation can stimulate economic growth by encouraging consumption and investment, although this is a debated concept.

Highlights

Economic life is characterized by the continuous rise in prices, which is odd considering historical income and price differences.

In 1813, Mr. Darcy's income of 10,000 pounds a year would be less than half of a primary school teacher's starting salary today.

The debate over whether an income of 20 pounds a week is sufficient to be considered well-off and the historical context of this question.

Inflation is a relatively new concern historically, with the Spanish Empire's collapse due to unrecognized inflation in the 17th century.

Governments obsessively track inflation and collect vast amounts of data to ensure precise statements on the inflation rate.

Inflation can be caused by cost-push inflation, where business costs rise and are passed on to customers.

Raw material costs, particularly oil, can increase due to global development and demand.

Workers may demand and receive higher wages, impacting business costs and potentially leading to cost-push inflation.

Land rents might increase due to insufficient construction of factories and offices, contributing to cost-push inflation.

Demand inflation occurs when the number of people wanting a product exceeds its supply, often due to increased wealth and spending power.

Government actions like tax breaks can inadvertently cause demand inflation by increasing disposable income and spending.

Lower interest rates can stimulate spending and borrowing, potentially leading to demand inflation.

Government money printing as a method to stimulate the economy can lead to inflation as the value of money decreases.

John Maynard Keynes' idea that a temporary increase in money supply can stimulate the economy before inflation sets in.

Inflation can be beneficial for economic growth if managed correctly, as it can increase consumption and production.

Monetarists oppose Keynesian economics, arguing that any increase in inflation is harmful and should be avoided.

Inflation's main problem is the uneven rate at which different goods and services increase in price, leading to economic instability.

Extreme inflation, as seen in Hungary in 1941, demonstrates the devastating effects on savings and the value of money.

Inflation reflects the instability of the world and the economy, as it is difficult to control due to various factors.

Learning to live with inflation is part of economic wisdom, as it is inherently unstable and must be managed rather than eliminated.

Transcripts

One of the oddest things about economic life is that the prices for things keeps rising?

Incomes and prices in the past were amazingly different from what they are today [in] Pride and Prejudice, Mr.

Darcy supposed to have [been] one of the richest people in britain

It's 1813 and his income is 10,000 pounds a year today

That's less [than] [half] of what a primary school teacher straight out of college would earn in sense and sensibility

[there's] an argument about whether an income of 20 pounds a week is enough to make you well-off and the answer is yes

It's there in living [memory] to a cinema ticket was 30 p in 1970 today

It's 13 pounds, so what does inflation happen and should we worry if it does?

Government's track inflation, obsessively and try to keep it low

there's a vast amount of [data] collected all the time to ensure [that] governments can say with amazing precision how the

Inflation rate is going

is it on track for two point three percent per annum [or]

Might the increase of low point three eight percent in February be a cause for alarm

This is in big historical terms a relatively new concern

In the 17th century the Spanish Empire essentially collapsed from inflation without even realizing it was occurring

So over time societies have become obsessed with measuring [inflation] and very focused on managing it

So why is there inflation? What makes it happen there are basically three reasons?

The first is what economists call

cost-Push inflation

This is where the costs to businesses rise and are then passed on [to] customers

There can be a lot of reasons for these rises firstly raw materials

Especially oil might get more expensive for a very nice reason because a lot of countries are developing and doing well

secondly workers might be asking [for] more money and

Succeeding either because they've organized themselves well politically or because schools and colleges haven't been training enough workers in the skills that companies need

Thirdly land rents might be increasing because not enough factories and offices have been built which tends to come down to political

Failures around building permits the result of all this is that businesses then push their extra on to the consumer by raising prices

They don't want to it's a scary move but they have no choice. They'd go out of business otherwise

The second kind of inflation is called demand inflation

This is when there are increases in the number of people who want something whose supply can't keep up

The most common cause of demand inflation is an otherwise rather nice thing that people are getting richer and have more money to spend

That's why government can cause inflation by lowering taxes everyone loves tax breaks because they raise disposable income

But in the longer term raising demand can also cause price rises thereby negating some of the initial boost of the tax break

similarly a fallen interest rates may cause short-term pleasure and long-term inflationary pressure if

Interest rates on loans or mortgages fall we might be tempted to take out a loan [to] buy the new car

We've always wanted but the car company sensing solid demand will soon enough

Jack up the price if banks and governments inject more cash and credit into the economy people have more money to spend

But if they're all chasing the same number of goods as before [it] just means they can all offer more for the same

This is what happened around housing in the uk particularly in London

They were broadly the same number of houses there were 25 years ago, but they all costs an absurd amount more

The third classic cause of inflation is government's printing money

There's a deep logic behind this idea which can at [first] sound almost criminal

Governments often want to stimulate the economy to create more jobs

So they print more money this can be done literally by increasing the number of notes in circulation

Or they can do it by increasing government

Debt or by letting banks make bigger loans on the same security in all these cases the amount of money in circulation

Increases, but there's a big problem because after a while it means the worth of every note starts to fall because more notes are

Chasing the same number [of] things to buy. There's more money about but it doesn't buy you more it just pushes up prices

However, there is a possibility here spotted by the economists and [Philosopher] John Maynard Keynes

It takes time for the value of money to fall so for a little while

There can [be] more cash around and prices haven't yet risen this is a window of opportunity

[that] economies can with a lot of luck [cease]

At such Goldilocks moments people can actually increase their consumption

Firms can afford to hire more workers and buy new machinery and once they've done that production will increase

There will be more stuff to buy before inflation is eaten up the [gain]

So there's a real expansion a bit of inflation can grow the economy

That's a big but contested idea

The argument is that it doesn't matter if prices are going up [ten] percent every year [if] wages are going up 15 percent

So deliberate government-led inflation can be a mechanism for growing the [economy]

But it's a very risky move which is often backfired and been attacked by the great enemies of the Keynes ian's economists people

we now know as the

Monetarists who believe that anything which increases inflation is always going to [be] an issue and must be avoided at all costs

whatever the short-term

So why is inflation such a problem the real problem? Is that not everything inflates at exactly the same rate if

Everything went up by hundred percent a year and so did everyone's income and it was all totally steady and predictable

It would be weird

But it wouldn't actually do any harm the harm comes from the fact that not everything changes at the same rate

in 1941 in Hungary

inflation reached

[150,000] percent each day a jelly bean that [cost] 10 p on Monday morning would therefore cost the equivalent of

150 pounds on Tuesday morning, and

225,000 pounds on Wednesday morning, that's incredibly complicated

But it's a problem [only] [because] other things would not be increasing as fast

If you kept your life savings under the mattress you'd be wiped out in a day [or] two

The money that could have bought you a house on Monday would get you a jelly bean on Wednesday

This is the Ultra Extreme case, but it illustrates a basic point

Inflation is bad for savings

There's no point in putting money aside, and that's a pity because saving money the attitude of saving up for things before you buy them

Is an admirable?

characteristic

keeping inflation Low rewards prudence

It helps long-term planning because you can know what your money will be worth in the future and this rewards taking care around costs

Ultimately what inflation reflects is the instability of the world and of life itself?

Prices rise because we can't yet keep the complex system known as the economy under control

There's always something going wrong or growing or falling or failing somewhere

Ideally would keep inflation under control with a more or less fixed amount of money chasing a more or less stable amount of Goods

But in reality [low] inflation is extremely difficult to achieve because so many factors can derail it

cost of Materials cost of [Labour] productivity

Taxes falling or rising exchange rates again falling or rising a growing domestic economy a neighboring economy. That's growing

Falling interest rates the buying of government bonds or the printing of money in the end we may have to accept that?

Inflation is a bit like the weather or our own moods something that's inherently rather unstable something whose ups and downs

We must endure even as we try to mitigate the extremes learning to live with inflation belongs to wisdom