Inflation. It’s one of those economic terms that gets thrown around a lot, but perhaps not explained as much as it should be. I’d like to offer an accessible and brief guide to understanding inflation, mostly for intro economics students but also for anyone that may find themselves in a situation where someone tries to tell you that inflation is “bad” or “good”. Inflation is a necessary part of our current and modern economy. It is neither good nor bad, it simply exists, and there are benefits and consequences to relatively higher or lower inflation.
The debate on inflation should always be about whether one believes the inflation should be higher or lower, and include discussion on the possible consequences. Let me emphasize, this is a should question. Most economists can agree on a range of acceptable inflation, the debate is mostly over the optimal rate of inflation. When someone says “bad inflation”, you might be better off thinking in your head “non-ideal” inflation. Sometimes there truly is bad inflation, but not in the US for the past decade.
Here is an infographic from Mint.com. This infographic is a great place for you to start, despite the giant misleading dinosaur that threats to eat your investments. If you click on it, you can go straight to their site.
There are a couple things this infographic may still leave you wondering like..
How is Inflation calculated?
Every month, the Office for National Statistics gather the prices of hundreds of thousands of goods and services all across the country. The rise in these prices from one time period to another embodies the Consumer Price Index. The CPI is then used to calculate inflation. It’s not a perfect system, but the full process is complicated and generally considered accurate. Specific goods are given more or less weight, depending on how much consumers spend on them, and goods are tracked so that identical products are compared from month to month.
What is the Fed?
The Federal Reserve is the central banking system of the United States. It’s main purpose is to conduct Monetary Policy and maintain a stable economy. It typically operates separately from the United States government, although it’s members are chosen by the President and Congress.
So really though.. what about the gold standard?
Remember the section about hyperinflation, where they mentioned people will use their currency to buy up tangible items? Gold is one of those items. It has intrinsic value that is recognized worldwide, and some feel more secure in the value of gold then government issued paper. (Which, surprise, is what Dollars are.) However, there are many problems with “going back to the gold standard”. The world economy is much larger than the last time we were on the gold standard, and gold has a new role as an important component in computers.