Unpacking Inflation: Causes and Effects
By Inflation is a key economic concept that has evolved over time. Initially, it was associated with monetary debasement, however, by the mid-1900s it became synonymous with general cost-price pressures. Today, inflation is defined as an increase in prices over a certain period of time. While it can be beneficial to the economy, it can also become uncontrollable during economic shocks.
Inflation is usually the result of changing commercial circumstances, such as higher energy costs, wage increases, unfavorable weather conditions, union strikes, supply chain disruptions, foreign exchange movements, and increased circulating currency. Many people misconstrue inflation as simply rising prices and believe it is causeless, or due to something caused by the evil of private individuals. However, this is not the case. Rising prices are a symptom of inflation, but not its cause.
The primary cause of inflation is an increase in the supply of money and credit. This occurs when the currency supply is arbitrarily increased.[0] Economist Milton Friedman famously proposed that “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”[1] This means that inflation is caused by an increase in money supply beyond the growth of output.[2]
Inflation is a complex phenomenon and its true meaning is often misunderstood.[1] In order to prevent it from becoming uncontrollable, it is important to understand its cause and how it affects the economy.
0. “Inflation No Longer Has Monetary Applications” Investing.com, 20 Feb. 2023, https://www.investing.com/analysis/inflation-no-longer-has-monetary-applications-200635473
1. “Inflation Not Only Hurts, It Diverts” Hernando Sun, 20 Feb. 2023, https://www.hernandosun.com/2023/02/20/inflation-not-only-hurts-it-diverts/
2. “Inflation in the United States: A Brief Overview” Worldatlas.com, 23 Feb. 2023, https://www.worldatlas.com/gdp/inflation-in-the-uinted-states-a-brief-overview.html
