I was wondering if I put $1000 in the piggy bank for a year and the inflation being 10%, and everything else being constant, 1 year later that $1000 in cash money can only buy goods that today would cost me $900. So my question is: where did that $100 in value go?
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The core understanding of economics that you seem to be missing is that there is no value inherent in money. It has exactly as much value as people decide it is worth, no more, and no less; that is, money has only perceived value, and that value is therefore subject to the perceptions of the people who exchange goods and services for that money.
Inflation, then, is what happens when people collectively decide that money is no longer worth as much as it was yesterday. It's important to note that there is no one person who can make that determination; if one store owner decides that money is worth less, they can raise prices at their store to compensate for that perceived devaluation, but the implications of this decision are minimal, as customers can go to other stores whose owners value their money more. However, when many store owners have the same perception and raise prices in concert with each other, then you have inflation.
There are many factors that people take into consideration when deciding how much money is worth, including supply and demand (the idea that things are worth more when they are scarce and people want them), interest rates (the price of money, or how much the banks charge for lending money or pay for holding deposits), government fiscal policy (including tax rates, government spending, and financial responsibility — see also Liz Truss's disastrous mini-budget in the UK on that last), and the current state of the economy.
In summary, the value of money is subject to change in the same way the value of anything else is. There is nothing magical about money that exempts it from market forces, and there is no "universal law of conservation of value" that must be obeyed by money nor for any other commodity.
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(+1) a suggestion: "in concert with" suggests collaboration, which of course is not how inflation usually happens, and is not a necessity for it to happen – AakashM Oct 14 '22 at 21:06
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5Oh I get it now. I was thinking there has to be some inherent value that is conserved. Thank you very much for explaining it :) – user1070087 Oct 14 '22 at 23:44
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3@user1070087 The conserved value is the value of goods and services. If I buy $1000 of chocolate and keep it in the fridge, it's still just as tasty next year, as chocolate lasts a long time (although it may have bloomed slightly, which isn't a big problem). – user253751 Oct 15 '22 at 10:48
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2@user1070087: Value is conserved, in a sense - The overall amount of abstract wealth in the entire economy does not decrease as a consequence of inflation (but it may increase or decrease as a consequence of primary industries extracting value from natural resources, natural disasters, and other non-inflationary forces). However, a depositor is a creditor of the bank, and inflation has the effect of moving wealth from creditors to debtors (because the amount due is denominated in some currency, which becomes less valuable). – Kevin Oct 16 '22 at 00:20
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1I.e. it is an instance of that idea where that while an individual human may be very complex and virtually impossible to predict over the long term, an aggregate of humans "averages out" and can actually follow predictable scientific laws. Like traffic waves, or other such crowd phenomena. No one person actually chooses to initiate or decides with the aim of participating in the wave. Instead, it happens logically as the result of each individual's reaction to their local circumstances. – The_Sympathizer Oct 17 '22 at 02:35
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1For posterity, could you elaborate or link on "Liz Truss disastrous mini-budget"; in 5 years nobody might remember her. – gerrit Oct 17 '22 at 11:45
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This answer is dishonest with fiat monetary systems. No people decided that money is worth less. It is worth less because there is more of that (infinite) commodity in relationship to finite commodities. – paulj Oct 17 '22 at 13:41
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1@paulj On the contrary, my answer applies only to fiat money. With fiat money, the value of money is inextricably bound to what you're able to buy with it and thus what people are willing to give you in exchange for it. The value of commodity money does not appreciably depend on public perception, because it is guaranteed redeemable at a fixed rate for the backing commodity. And indeed, commodity money does not experience inflation in the same way that fiat money does. I didn't bother explaining that in the body since no governments issue commodity money anymore. – A. R. Oct 17 '22 at 13:50
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3@AndrewRay that's kind of tautologically true for the backing commodity - one ounce of gold remains worth one ounce of gold - but there's no guarantee that corresponds to the prices of any other goods in a stable way. Even if you're using gold, cut to gas supplies -> price of gas goes up -> price of energy and all other goods produced using energy goes up -> inflation. – pjc50 Oct 17 '22 at 14:24
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@pjc50 & user253751 Commodity money can experience inflation (and deflation), but it was historically less common and the underlying causes are different. Again, it's not really relevant to this question. – A. R. Oct 17 '22 at 14:56
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1On thing to consider and perhaps might help people with this is inflation is caused by an increase if the amount of money relative to the goods being bought often stated as "too much money chasing too few goods". While we typically think of this as being caused by increase in the money supply, it can also be caused by a decrease in availability of goods. Sustained, widespread disruptions of the global supply chain, for example. – JimmyJames Oct 17 '22 at 18:46
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@user253751 Even the value of goods and services are not conserved. If factories start making more chocolates then the value of chocolates will drop. – slebetman Oct 18 '22 at 13:09
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@slebetman Nah. The value of one chocolate is always the same amount of tastiness. The exchange rate between tastiness and money may change, but that's just a measurement error caused by measuring in unstable units. – user253751 Oct 18 '22 at 13:12
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@AndrewRay Not quite. One of the earliest historical example of monetary inflation (some argue the first) was the Spanish price revolution caused by a sudden increase in the amount of gold and silver in the economy. The Spanish was literally "printing" gold (to borrow a modern meme) by shipping them from the Americas in large quantities. As long as you increase total "wealth" (GDP, income per capita etc.) you will create inflation. The only way to stop inflation is to stop creating wealth but to only shift/circulate wealth (zero economic growth). – slebetman Oct 18 '22 at 13:15
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@user253751 Not just money. The exchange rate between how many chocolates you need to sell to buy a house or car will also change. The more chocolates available in the economy the more you need to sell to buy a house. If chocolates were difficult to obtain you'd need to sell less to buy a house. Thus essentially as chocolate manufacturing got industrialized we got chocolate inflation (you need to make more chocolates than you used to before to buy a house) – slebetman Oct 18 '22 at 13:19
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@slebetman As I say, yes, there was inflation. But the underlying causes are different. Some factors that I gave in my answer, like government policy and public perception, don't matter anymore and it basically boils down to supply and demand. It's not really the same thing and doesn't apply in the modern world. – A. R. Oct 18 '22 at 13:22
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this is the theory. in reality this means that idiots in the government decided to print money - more then amount of money withdrawn. – BЈовић Oct 19 '22 at 08:47
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1@BЈовић Sometimes, yes. This time, no. In any case, that would be the "government policy" factor I included. – A. R. Oct 19 '22 at 12:55
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1 year later my money is now actually $900. So my question is: where did that $100 go to?
You still have $1,000. What happened is that you can buy fewer hamburgers for that $1,000. The prices of things are going up. That means your purchasing power is going down.
mhoran_psprep
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2But I'm still confused about where that $100 worth of value go? Because other than opportunity cost of not investing it. I have a very bad understanding of economics :( – user1070087 Oct 14 '22 at 19:00
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1@user1070087 where does the money go when you need to sell a collectible which you bought for $1000, but the best current price is $900? – RonJohn Oct 16 '22 at 16:49
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1@user1070087 If we assume inflation is directly caused by money printing (the real relationship is not that simple, no matter what goldbugs would have you believe) then other people got the newly printed money and your hamburger power went to them. – user253751 Oct 17 '22 at 14:32
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Pause on thinking about the concept of inflation as a whole, because I think you are considering multiple different concepts at once. Instead, think about your personal life, with your $1,000 piggy bank - let's plan out the cost of a hypothetical weekend vacation you might be planning to go on next month.
You buy your flight today for $300. You look at the cost of hotels in the area (looks like you can get a room for both nights at $250 total), and decide that you want to be flexible on where you stay, so you don't book anything in advance. You see there's a sightseeing tour there, and reserve a slot for yourself - looks like tickets will probably cost you $200 once you get there. That leaves you with $250 for food / entertainment costs - after doing some budgeting, it seems that should be perfect.
Then once you get there, what happens if things are more expensive than when you planned your trip? Perhaps fuel costs increased over the month, but you already bought your plane ticket, so no impact to you there. Maybe a bunch of hotels are all booked up, and the remaining ones bumped up their prices - now it will cost you $300 for hotels (not a lot you can do about this, as you didn't pay in advance, and you have to sleep somewhere). And the sightseeing tour became very popular, so it won't cost you $200, it would cost you $300 - you decide to cancel your reservation as it's too expensive. Restaurants in the area you're staying have also increased their prices - so you decide to buy food from a grocery store and eat some of your meals in your hotel room, instead.
'Inflation' is basically an estimate to show how much more expensive things become over time. Some things might impact you, some might not. Sometimes you can adjust your spending habits to compensate, and sometimes you can't.
When most people talk about 'inflation', they are basically talking about a country's 'Consumer Price Index', which is a specific way to calculate what a 'basket of goods' cost yesterday vs today. So like a liter of gas, a loaf of bread, a pair of shoes, etc. - add up an estimated mixture of what you might spend money on, and show what it cost yesterday vs today.
That money didn't "go" anywhere - it just can't buy what you thought it could previously. Below are a few reasons why this might be the case.
Individually, some businesses that now charge you more might simply be increasing their profits (https://globalnews.ca/news/9098447/canada-inflation-grocers-profits/ is an article describing how Canadian's are paying significantly higher food costs over the past 2 years, and the large grocery chains are raking in record profit). Some businesses might be directly covering their own increased costs. Maybe consumers are starting to demand higher quality goods, and the cheapest possible methods of manufacturing need to get replaced by more expensive methods.
Simplistically, the money in circulation in a country represents the value of all 'productive assets' within that country. If a country's real economic output drops, but the amount of money available stays the same, then each $ won't buy as much. In that case, 'where the money went' is the idea that there are simply fewer real goods to go around, being chased by the same amount of $ in circulation. This is a decrease in supply of goods.
As a final alternative, maybe your government just printed $1,000,000,000,000 - now the number of goods being produced is the same, but there are more $'s chasing those goods. This is an increase in the supply of money.
Grade 'Eh' Bacon
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Remember that money is just a convenience. Instead of money, everyone could trade goods and service -- this is a barter-based economy.
So imagine instead of having $1,000 dollars in the piggy-bank, you're a farmer with 1,000 lbs of wheat in your silo. And when you want to buy something, you give them some of your wheat.
Suppose last year, you could buy a dozen eggs for a pound of wheat. But then there's a disease that kills off lots of chickens, so there aren't as many eggs to go around. So the chicken farmers raise the price of eggs. And the people who sell products made with eggs (e.g. bakers) also have to raise their prices. Now that same pound of wheat can only buy 11 eggs, and buying a cake will cost more wheat.
That's inflation. The 1,000 lbs now buy what would have cost 920 lbs a year ago. But those 80 lbs of wheat didn't go anywhere -- they're still in the silo, but you can't do as much with them.
Barmar
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It would be interesting to extend this analogy to the scenario of increased money supply. In other words, what happens when there is a bumper crop of wheat, so everyone has more wheat than normal? – IMSoP Oct 16 '22 at 20:24
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2It's not true that before there was money everyone traded goods and services. This is a fable/myth that David Graeber spent considerable time demolishing in hisbook Debt. Afaik the only criticism of Graeber for that are same claims that he was attacking a straw man. – bdsl Oct 17 '22 at 01:08
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1@bdsl I've changed my answer to be a hypothetical instead of a statement of history. For my purposes it doesn't matter. – Barmar Oct 17 '22 at 04:37
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Thanks. Afaik the rarity of the "coincidence of wants" makes a barter based economy impractical. – bdsl Oct 17 '22 at 10:37
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@bdsl So how would people get things they didn't create themselves? Was there someone who would give the poultry farmer wheat in exchange for their eggs, the wheat farmer milk in exchange for his wheat and the dairy farmer eggs in exchange for his milk? Or some similar deal broker? Or was there just no trade? – Lio Elbammalf Oct 17 '22 at 14:33
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1@LioElbammalf That's what he means by "impractical". It didn't take long for primitive societies to come up with things like using shells or beads as currency. – Barmar Oct 17 '22 at 14:37
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@Barmar Indeed - its clearly an impractical process. What I meant was, did trade simply not happen before an agreed currency or was there some such impractical solution first? I'm not sure whether the comments are based on known facts or speculation based off what makes sense (i.e. when you say "it didn't take long for primitive societies..." is that because you know dates and examples of previous attempts and the timeline? Or because, to us, its obviously impractical. Surely they couldn't have done it for long?) [Not a criticism, just asking - aware things can come across badly online] – Lio Elbammalf Oct 17 '22 at 15:10
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See this MASH episode: For Want of a Boot where they used a network of trades. Other things that were devised were futures ("You give me X now, I'll give you Y after the harvest"). – Barmar Oct 17 '22 at 15:18
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My answer was not meant to be an illustration of how barter actually works in practice, it's a simplification to illustrate the point. – Barmar Oct 17 '22 at 15:19
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@LioElbammalf I think either people would gift things to each other within small communities, or a powerful leader would distribute things to people and accept tributes.
You might be in someone's debt because they gave you something, but not express that debt in the form of money.
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That's right. In a small community, you don't need explicit barter. If someone takes without giving roughly equally, the freeloader becomes well known and will be ostracized. This is how things work in ape communities, I believe. – Barmar Oct 17 '22 at 19:39
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There's a lot less need for currency when all trade is within small groups - you can simply remember what individuals contribute and/or who owes what to whom. – bdsl Oct 17 '22 at 19:40
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@bdsl But it was rare that communities were entirely self-sufficient. So things get more complicated when groups trade with each other. – Barmar Oct 17 '22 at 19:41
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@Barmar yes - and afaik trade with strangers is the one case where barter may have been used in practice.. – bdsl Oct 17 '22 at 19:42
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The value of money lost to inflation doesn't really "go" anywhere. This is a misconception.
But there is something called seigniorage, that is almost as you meant in the question. That is, the very act of creating (minting, printing) money somewhat transfers purchasing power from all money that already exists to the newly minted/printed money, akin of debasement of coinage.
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1The only correct answer with fiat money systems currently employed by nation states. – paulj Oct 17 '22 at 13:39
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Creating money is related to inflation, and can cause inflation, but it's not the only thing that creates inflation, but this answer still probably does get to the point of what the asker was thinking of. – user253751 Oct 17 '22 at 14:36
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@user253751 but this is most convincing in the long run, as supply/demand shocks are transient (economy adapts to various conditions, wars end etc.) while central banks sadly seem to last forever. – very big cat Oct 19 '22 at 08:08
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@verybigcat why do you say sadly? I detect ideological possession. Before central banks, inflation was 20% some years and -20% in other years, playing absolute havoc on investors, and we all know the economy runs on investment, right? – user253751 Oct 19 '22 at 23:11
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@user253751 it only wrecks havoc on investors who are over-leveraged. If you have no debt, you don't really care if your company earns 5% or 15% in the short run. You can earn more one year, and less on the other year. – very big cat Oct 19 '22 at 23:21
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Speaking of ideological posession, I think I have the right to have libertarian political views and dislike central banks. I think that some ups and downs are to be expected and embraced. Sure monetary policy smooths out the rough times a bit, but also it eats savings when the times are good. So I obviously want less of it. – very big cat Oct 19 '22 at 23:28
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@verybigcat Leverage is fundamental to modern investing. By the way, what is the natural rate of inflation? – user253751 Oct 19 '22 at 23:33
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@user253751 sure it is, and I also have a mortgage. But I took just half of what banks offered me. Sure I could technically buy bigger hard asset for bigger fiat currency loan but... You see what happens to big mortgages when gas is cut and interest rates are high. I imagine just about everything would be slightly cheaper if access to credit was smaller, and cash-hoarding was more popular. I don't want maximum GDP, I want freedom and peace of mind. – very big cat Oct 19 '22 at 23:39
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@verybigcat you're going to be fighting with a lot of economists and politicians if you want them to reduce GDP on purpose! – user253751 Oct 19 '22 at 23:40
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@user253751 there's no need to reduce GDP, in fact I'd love to get it maximized by providing economic actors with more motivation. I would work slightly more happily if income tax was halved. I would also embrace spending more if sales tax was halved. – very big cat Oct 19 '22 at 23:43
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As Milton Friedman famously said:
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.”[2]
According to the so-called Cantillon Effect the missing value of the money is transferred in the course of the inflation to the institutions which are closest to the newly created money.
That means Banks, Government, and also e.g. people taking out a mortgage. Since new money is generated using Loans and Debt.
[2]: [Milton Friedman, Inflation Causes and Consequences, Asian Publishing House, 1963.]
EDIT:
Side note:
Provided the amount of money in circulation is static, there would be deflation since global wealth is rising every minute (through discoveries, improvements, trade, etc.). Also, some actors are adapting to the decreasing value of money through so-called shitflation and shrinkflation. That means the institutions controlling the amount of money in circulation (Governments, Banks etc.) are actually extracting much more from the economy than is the perceived inflation.
shitflation - lower quality goods for the same money
shrinkflation - lower quantity of goods for the same money
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As others have said, after one year, the $1000 in your piggy bank will have $909.09 worth of spending power. On the flip side $1000 owed to someone will also be worth $909.09 after one year (interest considerations aside). So one way to think about where the value goes, is from savings to debts.
The same is true when governments print money (quantative easing). The value of a dollar, say, goes down, meaning that the value of savings, and debt, goes down. It's as if the government took money from your savings account to pay their debts (and anyone else who owes more than they have in savings). See also @Kevin's comment.
If you could buy something for $1000 and its value rose in line with inflation you could avoid the loss. I think this is why gold is attractive at during periods of high inflation.
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Inflation happens when the government just prints more money so they are now worth less. This explanation is called monetarism. This may look like a nasty thing to do but there are arguments that small controlled inflation encourages people to buy and consume more rather than save, or to invest money somewhere. Both are useful for economy. Hence slow and steady rate of inflation is actually favored by the most of economists.
At the times of crisis, it is not unusual for the government to print enough money that all savings become worthless, essentially nationalizing them. It was one of the reasons why keeping dollars at home was illegal in the former Soviet Union: it was required to keep savings in roubles, so that the government could easily take them away without even visiting you, by just printing more roubles. Eventually they did. They also did with Czar roubles during revolution. Young post soviet states did that with they first iteration of currencies (not the second, and not with Euro that followed).
Should I think this happened because everybody stopped valuing roubles without any obvious reason or there were other very complex reasons beyond my understanding that turned all my money into rather bad toilet paper?
From Wikipedia, it looks like there are other explanations for inflation as well (Keynesian, etc), but after reading through them I do not really get how do they exactly work without printing more money, and why do we need other explanations after more money have eventually been printed.
I belong to the family where three generations in a row have lost all savings due inflation, hence would afford to consider these other explanations just PR.
h22
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this may be true for the Soviet Union but it doesn't explain very much about any economy that isn't a totalitarian dictatorship – user253751 Oct 17 '22 at 14:34
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you do not see any difference between the USA and the Soviet Union? – user253751 Oct 17 '22 at 14:37
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USA was never in the crisis deep enough to turn dollar into toilet paper but they will under the need. They do print a little bit more dollars time to time. As I said, this discourages saving and creates some extra income for the government. I think this is also the main reason why governments do not like bitcoin so much. The price of Cessna 172 was US$8,995 in 1955. A really good bicycle now may cost more. Have you not been robbed a little bit? – h22 Oct 17 '22 at 15:11
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Before reaching integer underflow on the downvote counter here, maybe could you better answer my question then. https://money.stackexchange.com/questions/153144/have-evern-been-a-notable-inflation-without-government-just-printing-more-money – h22 Oct 17 '22 at 15:27
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Inflation has multiple causes, some are short-term and some are long-term. Currently we have a big inflation because of yet another fuel shock - multiple countries sanctioned Russia because we (temporarily) don't want to buy fossil fuels from war criminals. In that case the value of your money didn't evaporate - you just need to spend more money on energy, which became more valuable now... That is unfortunate for most people but if you own solar panels, windmills or a coal-based power station, that's good for you. Of course we wouldn't have any fuel crisis if we actually cared about environmental sustainability and energy security, but seems that we don't.
There are cases where natural resources are depleted or not usable (i.e. water shortage, soil salinity, storms) and in that case the increase of food price is higher because again, raw materials got more valuable or products are destroyed.
There are cases like COVID where people are unable to work, while still getting (government) money, and in that case there's a lot of money, and a lot of demand for goods, services and investments, while not enough work is done, which reduces supply of good and services... and the prices must go up. In that case, if your model of work wasn't affected by COVID (i.e. you work from home on your computer and you're more productive than ever because you are happier and you don't need to commute), the value of your money gets diminished, because now in the grocery stores or electronics shops you compete not only with other workers, but also with non-workers (people and corporations) who receive handouts while you are taxed.
And speaking of taxes, since gold has been confiscated from the population in 1933 in USA, and gold standard lifted in 1971, there is another long-term driver of inflation, which are the central banks. Using government money is mandatory. Central banks around the world mostly have a yearly inflation target of 2%, which means that on average peaceful crisis-free year they intend to decrease the value of your piggy bank by 2%, by printing money and buying assets with them, or by printing money and handing it out to poor people and rich people alike. Of course, it's under the pretense of stimulating the economy by making cash-hoarding cost 2% yearly, while strengthening demand, and sure it does increase demand, but that means that prices go up - and value of your cash goes towards government programs, not toward your personal goals.
Governments try to protect people from price increases by imposing minimum wages on business and it does work to some extend (workers in rich countries are as rich, as specialists in poor countries), but also it has some side-effects, like outsourcing work to far-away countries, or stimulating automation and robotization. Which is good if you ask me, but will eliminate unqualified work, which again forces government to issue handouts, or pay for education, or allow masses of people to go poor.
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Inflation is defined as the rate at which the prices of goods and services rise over time. The main reason for inflation is the increase in the money supply. When the money supply increases, each dollar becomes worth less because there are more dollars chasing the same number of goods.
In your example, if the inflation rate is 10% and you put $1000 in the piggy bank for a year, then one year later that $1000 will only be able to buy goods that cost $900 today. The $100 in value has been lost due to inflation.
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"if the inflation rate is 10% and you put $1000 in the piggy bank for a year, then one year later that $1000 will only be able to buy goods that cost $900 today" — No. If inflation is 10%, one year later that $1000 will be able to buy goods that cost $909.09 today. (1000 / 1.10 ≈ 909.09). The loss is $90.91, not $100. Refer to 0% rate of return + inflation differs from inflation alone. – Flux Oct 21 '22 at 14:31
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In short it is partially a tax. https://en.wikipedia.org/wiki/Seigniorage#Seigniorage_as_a_tax And it can partially happen due to market shortages.
One of the tools used by Federal Reserve to manipulate money supply are Open Market Operations. In short, central bank can create new money, and buy securities with them.
What does that mean for you? It means that price of securities is inflated, while the price of dollars in your pockets is decreased.
In essence, they can print money, and buy stuff with them, while money in your pocket loses value. The value of your money goes towards stocks or bonds owned by Federal Reserve / Central Bank.
https://www.federalreserve.gov/monetarypolicy/openmarket.htm
very big cat
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3That is one possible cause of inflation, but it is not the only one, let alone a description of inflation itself. – IMSoP Oct 16 '22 at 20:16
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2Yeah sure, inflation can happen due to increased consumer optimism a.k.a. increased velocity of money. But in the long run, it's because there's more and more money available. – very big cat Oct 16 '22 at 20:17
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4As others have pointed out, inflation can be driven by shortage of value in the economy - a harvest failing, a war cutting off trade, a non-renewable resource being depleted... Even if we mined all the world's gold, shared it out, and used it as a perfectly finite currency, the value relative to other commodities would fluctuate based on supply and demand for those commodities. – IMSoP Oct 16 '22 at 20:28
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2Sure, and that is partially the case currently in 2022 in Europe due to Putin's war. But still, if you look at historical supply of dollars, it's always ever-increasing. https://fred.stlouisfed.org/series/M2SL An also, central bank around the world always try to achieve 2% inflation target. Which means, they try to tax money-holders at 2% yearly. https://www.grid.news/story/economy/2022/09/29/central-banks-around-the-world-are-fighting-to-get-back-down-to-2-percent-inflation-why-look-to-new-zealand/ – very big cat Oct 16 '22 at 20:36
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3I never claimed that bank policy didn't create inflation. I just pointed out that a) it's not the only thing that causes inflation; and b) the question doesn't ask for the causes of inflation anyway, it asks for an explanation of how inflation works, in terms of value. – IMSoP Oct 16 '22 at 22:01
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1I am really in dept surprised how this is suddenly downvoted. I am still convinced this is the only true reason of the inflation while the rest is just PR. – h22 Oct 17 '22 at 11:24
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1@paulj I'm not sure which part, of which comment, that's a reply to, so have no idea how to respond to it. – IMSoP Oct 17 '22 at 13:59
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1@h22 Then you were convinced by sources which gave you an incomplete picture of the current situation. Either because they didn't know better themselves or because they intentionally wanted to manipulate your political opinion. Increase in money supply is one reason for the current inflation, but it is not the only reason. The other reason is that certain commodities simply got more valuable due to less availability. And no, the war in Ukraine is not the only reason for that scarcity either. But that really goes too far off-topic. – Philipp Oct 18 '22 at 14:20
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So if bank policy is one of the reasons for inflation, can we say that inflation is partially due to natural reasons, and partially a tax? – very big cat Oct 18 '22 at 16:11
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@IMSoP How does a "shortage of value" cause inflation? Assume there were only two goods in the world, Food, and Energy. If a failed harvest drives up the price of Food wouldn't it also drive down the price of Energy, since consumers would have less money to spend on Energy? Is this not the reason that Milton Friedman said inflation was exclusively a monetary phenomena (and the same theory he won the Nobel Prize for? – SafeFastExpressive Oct 21 '22 at 22:30
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@SafeFastExpressive I am not an economist, but my brief reading on this suggests the topic remains controversial along experts. I also noticed a gap between what economists consider inflation (a long-term trend) and what individuals generally care about (any decrease in their spending power). My uneducated assumption in your example is that the people producing Energy need to charge enough to buy Food, so the price wouldn't just change symmetrically, and there would be some overall decrease in spending power of people's assets. – IMSoP Oct 22 '22 at 09:51
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In the perfect world without central banks it could indeed happen that increase in food price leads people to spend more on food and less on energy. They simply couldn't afford so much luxury products during times of shortage and everything else would be left unwanted in the shop. People would keep carrots rather than lawns for example. Sadly modern economists and politicians seem to prefer high consumer demand rather than strong currency and environmental sustainability. Therefore they print money and give out cheap loans, so that people over-consume. – very big cat Oct 24 '22 at 09:05
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TLDR: it goes into government programs
If you were free to use gold in everyday transactions, there would be deflation. Each unit of gold earned earlier in the pioneer times becomes more valuable each decade, because creating value is infinitely easier now with developed economy, to which the ones working years ago contributed.
Sadly we're forced to use fiat currency now. And thus the value goes to the government. Government can take out debts, and them pay them back by printing money. So it seems like they provide more public services than they charge in taxes. The difference is inflation.
very big cat
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That is, goods cost 10% more solely because money is worth 10% less.
– Robbie Goodwin Oct 17 '22 at 23:42