Day 65: Inflation - Part 2

I forgive myself for accepting and allowing myself to have created an economic system that consists only out of trade-offs - where in order to have economic growth, people have to sacrifice purchasing power and - in real terms, nothing much changes to the situation, where people continuously still struggle to pay their bills and acquire what they need and in order to live a fulfilling life.

I forgive myself for accepting and allowing myself to not realise that the fact that people generally earn more money in certain countries, doesn't mean that they are better off, because the prices in those economies are higher and thus, they still pay their ass off like in any other place.

I forgive myself for accepting and allowing myself to admire the economic system for the way in which it balances itself out - instead of realising the implication of trying to find an equilibrium: that you continuously sacrifice one goal for another and in the end - it is impossible for everything to be in the best possible way for everyone - there are always losers and people always have to sacrifice some part of what should be a given, a basic right.

I forgive myself for accepting and allowing myself to claim that our economic system is the best possible system because it provides the best results for everyone - while, in actuality, it doesn't do that at all - because it is designed to provide 'middle road' results - and we all know those roads never lead anywhere, but to compromise.

I forgive myself for accepting and allowing myself to give my power away to individuals, who are not even elected officials, but bankers, who get to make decisions about how much money should be in circulation and thus, how high prices should be - making decisions that directly affect everyone's lives full-on - yet, still claiming that within the current paradigm, we are free to make decisions and are not controlled by outside sources, believing that we actually live in a democracy where I get to be a part of decision-making, where I get to control my life.

I forgive myself for accepting and allowing myself to complain when inflation occurs and everything suddenly becomes so expensive, instead of realising that I only fucked myself over by not questioning how this reality works and taking steps to take power back - so that it is not 'some economic force' or some banker who affects my life - but it is all of us together, as a community, as a group - who get to decide what's in our best interest - yet instead of educating myself and taking action, I rather just sit there and complain and continue to struggle, because the system is apparently too big and too powerful and apparently there's nothing I can do about it.

I forgive myself for not accepting and allowing myself to realise how ridiculous our economic system is if prices can just 'inflate' all by themselves, without any ordinary person having a say in the matter - and suddenly we have to deal with these 'inflated' prices and have to re-organise our lives and consumption behaviour to be able to get by.

I forgive myself for not accepting and allowing myself to realise that the phenomenon of inflation is proof that free will doesn't exist - because you can't will away the higher prices and you can't get around them - you're stuck with it and you've got to deal with it.

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Day 64: Inflation - Part 1

What is this thing called inflation?

Inflation simply refers to the continuous increase of prices in an economy. So - two points are important to note: if prices go up and then remain stable for a while, we don't refer to it as inflation, as inflation only applies to a continuous increase in prices. Secondly - if the price of petrol keeps rising, but all other prices remain somewhat stable, we're also not dealing with inflation, because in the case of inflation all prices keep rising.

Measuring Inflation

One of the most common ways to measure inflation is by making use of the consumer price index (CPI). Remember from the previous blogs, that CPI reflects the cost of a representative basket of goods and services. To obtain the inflation rate, we calculate the percentage change int he CPI from one period to the next. Meaning - if the inflation rate is 7.5%, it means that the cost of purchasing a representative basket of goods and services increased by 7.5% from one year to the next.

Effects of Inflation

One of the major economic effects of inflation is that what a country is trying to sell to other countries, eg. exporting, will be more expensive for foreign countries to buy. Therefore, an economy loses its competitive edge on the international market and the performance of the economy generally goes down - in turn, affecting everyone operating within it. Another more obvious effect, of course, is that the cost of living increases, people become fearful and agitated and start throwing accusations around about who's to blame for the inflation. Some, however, claim that the greatest danger about inflation is that it will cause more inflation. When inflation occurs, people expect prices to keep on rising - therefore, they will quickly go and buy as much as they can now, before prices get even higher. Because more products are suddenly demanded, prices go up and thus, the inflation rate often increases, even pushing the economy in some cases towards 'hyperinflation'.

The Causes of Inflation

There are two main causes of inflation: demand-pull inflation and cost-push inflation.

Demand-pull inflation

The term speaks for itself - demand-pull inflation occurs when increased aggregate demand for goods and services pushes prices up. Aggregate demand can go up in any of the following cases, or combination of cases:
- when consumption spending increases
- when firms increase their investment spending
- when governments increase their spending
- when export earnings increase
In other words - whenever the amount of money in circulation increases in an economy, the prices will go up. Check: the more money is available in an economy, the less it is worth, which is reflected in higher prices - because with the same amount of money in your pocket, you can now purchase less stuff, which means that your money is not worth as much as it used to anymore.

Cost-push inflation

Cost-push inflation occurs whenever an increase in production costs is responsible for pushing up the price level. In other words:
- when wages and salaries increase
- when the cost of imported capital and imported goods increases
- when profit margins increase
- when productivity decreases
- when natural disasters occur, such as droughts or floods
In the case of cost-push inflation, we don't only have to deal with an increase in prices, but we also have to deal with a decrease in income and productivity. This is referred to as 'stagflation'.

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