Thinking Economically.

Some time back I mentioned how a major part of the reason I got into blogging was due to journal entries I had to make in one of my classes last year. It was there I shared one of those journals with you all. I was going through some of them again and decided to share another one. Here is my attempt at explaining inflation.

This is one I did back in May 2010. Just like before, I haven’t altered it except that I changed the lecturer’s name to only his initial.

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Journal Entry VII

INFLATION – Bigger Isn't Always Better.

INFLATION: Here's another one of those things you hear getting tossed about by the politicians and journalists that you think you get... And once again, you don't. I, this time wasn't fooling myself. I knew I didn't have a clue but I was interested in finding out, though.

Our lecturer, Mr. B, described inflation as, “A persistent increase in the general price level in a country.” It's is an easy enough concept: if inflation goes up by 10% that means prices go up by 10% - simple, right? I get that. What I – and apparently many others – didn't know is that if inflation drops to 6% or 4% it means that prices are still increasing but at a lesser rate. Prices actually going down is called “deflation”... I don't remember ever hearing about us going through one of those...

So what causes inflation? There are different causes, as outlined in class that day (The stuff in blue is actually from class):

DEMAND PULL INFLATION – Aggregate Demand (AD) rises faster than supply. (Then, maybe it's time to go on a diet.)

COST PUSH/WAGE PUSH INFLATION – Cost of production increases leading to an increase in prices. (Sad, but true.) Also, an increase in wages is considered a production cost increase.

MONITARY INFLATION – Increases in money supply leading to increased AD leading to increased prices. (Who says too much money can't be a bad thing?)

PRICE PUSH INFLATION – Firms/merchants increase prices to maintain profit margins. (You greedy bastards!)

STRUCTURAL(IST) INFLATION – Bottlenecks (in the supply of raw materials or final goods) exist in the economy structure creating artificial shortages leading to higher prices. (Okay, how is that my fault?! Why  I have to pay?)

IMPORTED INFLATION (What? Our own inflation isn't good enough?) – The source of the inflation lies outside the country. High prices originate in the country of origin leading to high prices in the purchasing country. (Who needs M&M's? Cheers* are just as good.)

There are, of course, different levels of inflation. The best way to describe it is to imagine you're horseback riding – Okay, I never have either. Just follow me on this, alright. First there's an easy, slow creeping/persistent inflation which is an inflation rate of 2% – 6%. Then, ooh, there's trotting inflation and things speed up to 10% – 20%. You're okay, though. Just need to keep in that saddle. Kinda fun in a scary way. About the time you reach excessive/runaway/galloping inflation – 20% plus – you don't care anymore if the girls see you sobbing in terror like a baby, you just want someone to stop this accursed animal. At hyper inflation, which is a whopping 1000% PLUS! (Yes, PLUS!), you (or in this case, your economy) have already been shaken to death like your horse was a British nanny (are metaphors within metaphors really so wrong?) and you're being dragged along the rocks with your foot caught in the stirrup... Gruesome, huh? I thought understanding something made it less scary...

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* "Cheers" is a locally made chocolate coated candy.