Inflation

You may be familiar with the term inflation because it is an important economic concept that impacts your everyday life. The definition of inflation is an increase in the price of goods. Simply put, that means you have to spend more money to buy food, go to the movies, purchase clothes, and fill up your car with gas. Inflation makes the cost of living more expensive. During periods of high inflation, the price of goods and services increase substantially. For example, the same item that used to cost $100 now costs $125.

There are three main theories as to the causes of inflation: demand-pull inflation, cost-push inflation, and monetary inflation. Demand-pull inflation is linked to supply and demand and the increased desire for specific items without the requisite increase in supply for those products. For example, the recent Broadway production, Hamilton, had a significant demand, but not enough seats for the public to see the show, so the prices of tickets skyrocketed. The second theory of inflation is called cost-push inflation, which occurs when manufacturing or other production costs increase, which then causes the price of the ultimate product to increase. In the mid- 1970s we were in a period of high inflation and one of the main causes was increasing oil prices. Because oil is used in the production of many different items, as the cost of oil increased, so did the cost of many other goods (plastics, tires, and transportation costs). The third theory of inflation is called monetary inflation, which is essentially an increase in the money supply. Monetary inflation is caused when there is a high supply of money, which allows for more people to buy goods. This phenomenon increases the demand for those goods and supports higher prices. As more money is printed, then the prices for goods should increase. Of course, printing too much money will lead to the devaluation of the currency.

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