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Course: Finance and capital markets > Unit 3
Lesson 1: Inflation basicsWhat is inflation
Learn the definition of inflation and how inflation is measured in this video. Topics include the meaning of inflation, causes of inflation, and how the consumer price index (CPI) is used to track inflation. Created by Sal Khan.
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How can I find CPI data?(33 votes)
www.bls.gov/cpi(39 votes)
Why should prices go up every year?(16 votes)
For several reasons. First it lowers the risk for banks in case someone defaults on their loan, because the principal amount decreased in value. Second to stimulate spending a low positive inflation rate is healthy, otherwise it would be cheaper for people to save their money and just wait until products decreased in price. This is not good for the economy as you can imagine.(32 votes)
- I have a question about inflation, but it is not entirely related to the lecture. If the the treasury prints currency and doesn't release it into circulation, would that still cause monetary inflation? Another way to ask the question would be: Does uncirculated currency affect inflation? If there is a million dollars sitting around that is not put into circulation, what affect does it have on inflation? Another thing I noticed is that inflation sort of has a supply and demand element to it. As the price of goods increases, the demand for money increased and so money is printed to meet the higher demand for currency. As the price of goods decreases, the money is returned to the treasury as it is no longer needed, is that right?(11 votes)
If the government were to print money and stick it in a vault so no one could use it, it would be the same as the government not printing the money. Inflation happens when too much money is chasing too few goods. If there is money that is impossible to use, that money can't be used to purchase goods.
Now, in terms of reporting, it may be technically different. I know bank reserves are considered part of certain money supply calculations, even if they are sitting there doing absolutely nothing.(14 votes)
- Is there a CPI for every country ?(7 votes)
- yes
this is due to the different consumption pattern by the citizens of the country(4 votes)
- requirements,demands changes then how can we consider the same baskket of goods and services for both years?ref: 1.57.(5 votes)
If a large bill or coin is made in a big quantity would inflation rise significantly(1 vote)- I assume you are talking about the trillion dollar coin idea that has been floating around?
That idea would result in a large coin that is deposited at the federal reserve. This money would never enter circulation and would effectively raise the debt ceiling because the treasury would be able to draw on that money to pay their bills. It would not necessarily cause inflation. It would be inflationary to the extent that the government could keep spending at the rate it currently does (not necessarily inflationary) and to the extent that there wouldn't be massive deflation caused by defaulting on debt.
Both the Fed and the white house have stated they won't use such an option.(6 votes)
- Why do people lose purchasing power each year?(3 votes)
- How do prices go up each year, and why? What is the process that acts as a domino effect?(1 vote)
Is it possible for countries to manipulate basket goods to manipulate an inflation?(2 votes)- It is possible for anyone who is tracking a basket of goods to manipulate what's in that basket.
Making the basket representative is one of the major challenges in estimating inflation.(3 votes)
- I get what inflation means. Can someone explain to me why there is inflation?
A little info on how it happens is also welcome :)(2 votes)- Price inflation is nothing more that a way to shift focus on what inflation really is. If you inflate a balloon what are you doing? You are adding additional air to make it larger. Inflation deals with the amount of currency in circulation. If you add to it you have an inflated currency, take away it's deflated. Prices going up and down are a result of market forces.
Think of a supply and demand curve. When supply increase the value of that product goes down. Usually we measure that value based on the amount of our currency needed to purchase it. However currency is also a commodity. If yesterday $1 bought a pound of wheat today with a greater supply $1 is no longer worth a pound but 15oz of wheat. That loss of purchasing power is the symptom of inflation.
Where did the supplies you can no longer purchase disappear to? Your loss of purchasing power is used by the government when they spend the money they just created. Inflation is a hidden tax and that is why governments like it. Those who get the money first also benefit from being able to spend the new money before prices adjust. So the bankers and businesses with government contracts are not going to call them out since they also benefit the person who loses is the person who is at the bottom of this currency ponzi scam who left to pass the currency at an artificially high value.
We have inflation because the people who create inflation are the same ones who benefit from it. We have inflation because those who are in a position to put an end to it have little incentive to do so. So we have inflation because government can get away with it.(3 votes)
Why is inflation a 'natural occurrence' ?(1 vote)
Because deflation cause the stop of investment. So in a nice way to say, inflation is necessary for the investors put their money into businesses and companies. In the capitalism this is extremely important. However it's equally important to keep inflation under control. That's the roll of central banks with the interest rates.(4 votes)
Video transcript
Inflation - and when most people talk about inflation, they talk about price inflation. And that's just the increase in general level of prices for goods and services. And you probably have a sense of that. That every year in kind of a normal economy things seem to a little bit more expensive, although not everything does. Especially if you look at something like healthcare, cost of education, you definitely see things getting more expensive. One interesting question is how do you measure it? How do you measure inflation? And what the Bureau of Labor Statistics does - this is actually the most used measurement of inflation. They create something called a Consumer Price Index. And the way they do it is they define a basket of goods - actually a basket of goods and services. So what they do is go and look at the average urban consumer and they say "what do they need in their life?". "They may need some housing, they might need some fuel - natural gas for their home they need gasoline for their cars, energy in other ways. They might need some type of services - they might need transportation". And they try to come up with a basket of all of the things that the average consumer in an urban environment might need. And they figure out how much that would cost them in year One. And let's say that in year One, that it costs them a hundred dollars - the actual basket CPI constructs would not cost a hundred dollars. But I am going to do this for the sake of simplicity. And they will weight these based on how much - what percentage they think people spend on housing vs. fuel vs. services vs. transportation. Then, they will look at the same basket each year after that. So then they will do the same things - Housing, fuel, services, transportation. And this will be in year Two now. And let's say the same basket costs one hundred and two dollars. Well, then they will say the general level of price and services for this consumer went up by two dollars or went up by more important thing is by the percentage - by two percent. So, based on this measure, based on this basket of goods, prices went up by two percent. Or you'll hear the people on news say this "Inflation rate went up by two percent". Now, I want to clarify - what inflation - sometimes talks to inflation in the money supply. People talk about there's more money being printed. And often increase in money supply is one of the factors that is driving price inflation. When most people talk about inflation, they are talking about price inflation. They are talking about increase in prices. They are not directly talking about the increase in the money supply. Now this seems like a pretty simple thing to do - but it is not as simple as you might first think. Because think about something like TV sets or especially anything that is technological. Do you look at the same TV set that is getting probably cheaper every year or do you look at the average TV Set that the American household is having. Do you look at the same computer that is getting significantly cheaper every year or you look at the average computer every year? Then you would actually be looking at a different product. So there's actually a lot of things to think about and a lot of things how can weight this. And there's been a lot of controversy in when the weightings change in different periods of time. But this is the general idea and it is really just the best attempt to figure out on average how much more expensive or how much purchasing power are we loosing from one year to the next.