In this video I will look at Inflation, but with a particular focus on rising prices.
“Isn’t inflation rising prices?”, someone might ask. To this question, I would have to say “No”.
People certainly tend to think of inflation as being rising pric…
In this video I will look at Inflation, but with a particular focus on rising prices.
“Isn’t inflation rising prices?”, someone might ask. To this question, I would have to say “No”.
People certainly tend to think of inflation as being rising prices. So, in an inflationary environment, people will probably complain about the prices of products going up. They might grumble to themselves, or to people around them, saying that things in the shops are getting a lot more expensive. And they then might say, something like “Inflation is bad”.
But, in my opinion, it’s a mistake to think of inflation in this way. Inflation is not rising prices. The terms shouldn’t be used interchangeably.
Rising prices are the end result of inflation.
Inflation is defined, in classical economics, as an increase in the money supply – basically, to put it in everyday terms, the Government, or should I say the Central Banks, print money.
I think an analogy might help to explain the matter.
Imagine we’re in the countryside somewhere. It’s summertime, early in the morning – the dawn of a new day, the sun has only recently just risen - and we’re all gathered in a field. The weather is fabulous, there’s a slight breeze and there are only a few clouds in the sky. Conditions are perfect for a trip in a hot air balloon. The balloon itself is lying flat on the ground, deflated and spread out. One of the hot air balloon enthusiasts climbs into the basket and he fires up the gas burner. A number of people have to help fill the balloon with hot air. It takes a while, but eventually the hot air balloon gets filled up. The whole thing moves into a more vertical position and is ready for take off. A couple more people then get into the basket. A few more blasts of the burner and it’s airborne. They are up and away. In a few minutes, it has risen quite high and is travelling wherever the wind takes it.
The people left in the field watch on. Maybe one of them remarks to another … “Look how high it is.”
What causes the hot air balloon to rise? The answer is … the hot air inside the balloon. Hot air wants to rise above the cold air, thereby causing the balloon to rise.
The balloon can be regarded as being equivalent to the economy. The people in the balloon’s basket can be regarded as being equivalent to the Government or Central Bankers. The heat from the burner can be regarded as being equivalent to the mechanism by which money is created. And heating up the air inside the balloon can be regarded as being equivalent to inflation and the increase the money supply. The height that the balloon reaches can be regarded as equivalent to the rise in prices as seen in the supermarket.
We have to be clear that it’s the hot air inside the balloon that gives rise to (pardon the pun) to balloon being so high. It’s the hot air that is the cause. A distinction must then be drawn between the hot air inside the balloon and the height of the balloon. These two phenomena are definitely not t
