What Causes Inflation?

Inflation is an economic evil that is causing sleepless nights for the government and its policy makers. In developing countries, especially Africa, that are characterized by political quagmire and catastrophic levels of corruption, it stems from a lot of from administrative failures i.e., bureaucratic red tape.

I agree with anon251873. Although all of the reasons listed above are very good theoretical and textbook examples, greed plays a big factor in rising prices as well. The higher the price with the same costs associated with a product, the higher the profit margin.

Ultimately inflation, whether talking about a rise in prices or a drop in dollar value, happens because someone raised their prices (due to greed, fear, conformity, or someone else raised their prices) or someone doesn't want to believe the number that's printed on the money or written in their ledger. It's purely human. Everything else spoken of above is an influence on these emotional reasons.

GDP is determined by the value of production and exports a country manages annually. The total value of cash of any country (in a sane and reasonable world) would be dictated by the retrieval of raw resources and/or production of finished products and materials.

Every year, we sift more gold out of the ground, every year we drill and refine more oil, we farm more food, every year we mine more metals and make more cars, every year we make more software, computers, furniture, televisions, radios, the list goes on and on of raw materials and finished products. All of these have a quantified value that *reasonably* can create a legitimate increase of the volume of regulated inflation any country has.

However, we exist in what may an insane and unreasonable society. Every year, all national banks are practically gambling against the banks of other nations to see who had the highest and lowest yields of GDP and inflation, they gamble of which country's dollar will have lost or gained the most international pull.

We hand out bailouts like we did early this election cycle to large, predatory investment firms and banks, which money in turn gets re-lent with a new interest, to everything from small business owners who have hard luck or enough luck, to homeowners and college students, to many different businesses all the same. The investment system did (and probably still does) allow companies to invest against the success of a company (which is tantamount to gambling) especially with the current low interest environment, it's incredibly easy to gamble on the success/failure of a company with free money, if you have enough, but if you don't...

What I mean to point out is that inflation has a variety of sources and causes, but the one most irrefutable cause is debt. You see, produced goods, or gathered resources, garner a realistically valued and regulated inflation. Because an existing commodity can be traded to another country, or within the country, a medium of value can be exchanged, a.k.a. legal tender. However, when there is no produced good or gathered resource, there is only *expected repayment* which are often things like expected services, repossession of liens. Each swipe of a credit card in turn allows a bank to lend an amount of money that has an *expected repayment* directly attached, and is meant to be carried within the total circulating currency, but the bank can charge interest which is *not* counted in circulating currency; it is another expected repayment, a.k.a. unregulated inflation. Although a majority of banking has been ground finely down, and most unregulated inflation from banking interest is expected, and is yielded back through multiple loan transactions, the interest comes back, but not without generating even more interest.

And it all goes without saying that the federal bank has control of how much money is printed, but let's paint a more global picture.

Each year, an amount of money is printed that is meant to meet the projections of newly manufactured or collected goods, from oil to food to cars, to debts (included expected services to be rendered) and every country globally dictates the value of their currency to one another based on their GDP-plus-inflation vs. their competitors' GDP-plus-inflation. Unregulated inflation damages the spending power of any country on the global market against any other country that accepts their currency, due to overprinted currency that does not match the realistic value of exchangeable goods/merchandise/services vs. GDP annual growth.

So when your taxes go up but so does tons of pointless government spending, and when they print more to manage all the debt and loss between any imaginable loan, to outsourced jobs, and national welfare costs and wartime expenditures, you have to spend more to buy the same things because the money printed is worth less globally when it is printed beyond the realistic production of goods/merchandise/services for each year.

Obviously inflation is decreasing the purchasing power of money, or increasing the commodity prices. But in recent years one of the primary cause of inflation is inflated price of the oil. So global dependency on oil demand push inflation to the next level

inflation is also caused by failure to adopt a post harvest policy. in countries like Uganda, Kenya or the Congo, where they receive rain two times a year, they grow as much food and the best they can do is to export most of the food and leave a little for consumption.

however, when it comes to the dry season you find they are faced with shortages in the supply of agricultural commodities, and this leads demand to exceed supply, hence the rise in prices.

The short answer is that inflation is caused by an increase in the money supply.

The more interesting question is why do we have an ever-increasing money supply? This has to do with the way the banks have designed the monetary system.

Summarized: 1. All money in circulation is as a result of a loan (ie: if no person, no corporation, and no government were in debt, there would be no money).

2. All loans are subject to interest. All money in circulation, therefore, is subject to interest.

3. When banks issue a loan, the bank is actually issuing newly created money. It doesn't come from the so-called "bank reserves". The money comes from thin air.

4. When banks issue a loan, the bank only creates the principal portion of the loan. In return, they ask for principal plus interest. But the interest is never created.

In practice, what happens is that money that comes from new loans goes towards paying off the interest of old loans. That's why the money supply has to increase each year - it's so that people can find enough money to pay off the interest portion of their loans.

If the money supply did not increase, some people might be able to pay off their debts, but overall, and at any given time, the system would be bankrupt - unable to pay off debts because there isn't enough money in the system to do so. Our monetary system requires constant growth.

I think the main factors that cause inflation in economy are corruption, increase in population, increased rate of terrorism, and lack of resources.

Any process that makes money without offering something in trade for that money causes inflation. Wars are a good example. A company that makes bombs pays their employees who are able to buy food, cars, houses etc., but, since the bomb is destroyed blowing something up in a foreign country, that bomb company and those employees do not offer up something in exchange to the producers of cars,food and houses, except maybe the joy of knowing their county polices the world. This causes inflation because the money supply grows faster than the supply of goods.

Interest is similar. as are speculative endeavors. Interest adds no value to goods and so it is also money that may as well be used to make a bomb to drop on some 3rd world country. Speculation in goods, analogous to the dutch tulip-mania where prices rise solely because prices are rising, is the same thing. These all have another thing other in that none of them produces useful products and instead, which is that they are nothing more than wealth distribution schemes wherein a person who does not produce anything of real value to society prospers and becomes rich.

There are also other types of inflation, such as what occurs when demand increases faster than supply but this would only occur in specific sectors of commerce, with a concomitant drop in another sector, without the wealth distribution schemes described above and also without those schemes it could not envelope the entire economy as it does now.

It is hard to believe more people do not see the large in-congruence there is between the compounding productivity gains that occur on average in the overall economy every single year and how that barely translates to the average person.

In a steady state population, base prices should realistically drop every year since it takes less people to produce the same amount of goods and therefore the same amount of people can produce more. What is the case in the extremely fast moving technology sector should also be the case, albeit slower, in all sectors where goods are sold on a widespread basis and do not have continuous resource bottlenecks which are generally solved through innovation anyway.

Inflation happens when the top execs of the large companies in our country keep wanting more and more money in their pockets so they have to keep raising the prices of their goods to cover it. At least that's my opinion because it sure isn't because they are paying their workers more money and having to compensate for it.

Simply put inflation is the devaluation of the dollar. The main cause of this in the USA is caused by government policies. If politicians wanted no (zero) inflation they would have to curb their taxing and spending policies. This ain't going to happen until the nuclear holocaust.

inflation is basically caused by more money chasing fewer goods.When prime rates are reduced, cost of borrowing becomes cheap. simultaneously, investment in the money market also becomes unattractive. the resultant effect is that the amount of money in circulation in the short run increases. without a corresponding increase in production levels, general prices of goods and services surge up-inflation. -wisdom

Some say inflation is caused by the increase of the money supply, you know supply and demand -- too much money in circulation cause the money to lose value. This is the true meaning of inflation. All the other definitions are what is caused by inflation. Words mean something.

Economic theories are almost only applicable to developed countries where the founders of these theories are from! but they are less functional in less developed countries.

Overspending is yet another cause of inflation. consumers tend to spend too much as income rises and suppliers increase their prices to keep up with the demand. Van Der Westhuizen C.

Meanwhile, the economists have claimed that the wholesale price inflation near zero is a temporary statistical phenomena that should not be interpreted as deflation, as consumer price gains remain high.

I agree with the last two. more people, less "stuff" is basic.

anon 88475 has the essence of it: more people, less "stuff." All else is the incredible variety of ways humans have devised to divide it up(or just take it), create or define "value", etc, etc, etc. We think we are really smart. As Neitszche said, "Insanity in individuals is rare...in groups it is the rule...".

anon88475, you were on track with your assessment of overpopulation causing inflation, but the idea that people have a "right" to endlessly crowd this planet (on the notion that we'll find another planet to alleviate the pressure) is foolish and dangerous.

We've long had a technology called birth control that people just need to use more of. Births need to be balanced with deaths for sustainability in a finite world. We'd have a solid steady-state economy and an end to endless deficit spending. Nature would finally get some breathing room from the gluttonous aspirations of humanity.

The absolute root cause of inflation is the fact that we are all stuck together on one world with limited resources. As the world wide population increases every year, we end up with a situation where there are constantly more and more people competing for fewer and fewer resources.

One basic economic principle is that the more scarce something is the more valuable it becomes, i.e., gold is more valuable than oxygen because it is more scarce, even though it is less fundamental to our survival than oxygen.

Thus, as the planet's overall resources diminish and an increase in competition over these limited resources increases, all resources naturally become more and more scarce and thus increase in value.

This perceived increase in value caused by scaracity we make tangible by raising the prices on products, items and resources and we call this increase in prices on all things world wide - inflation.

Of course inflation will ebb and flow from country to country as markets change and resources and ownership change hands but as a general entity world wide, inflation always rises due to an ever-shrinking limited resource being fought over by an ever increasing competitive force which is us.

Such a situation cannot even be blamed on capitalism. but rather on the nature of humans in that we are constantly increasing our numbers and are trapped due to our technology on a planet with limited resources.

To slow inflation we must either limit our numbers, which is not a good option, as everybody deserves the right to procreate and have family, or expand our resources by improved technology which will allow for more renewable resources and travel out into the stars to search for more planets to exploit and cultivate. By M.O.S

thank you so much. you saved my geography project.

"As long as you don't print more dollars, inflation will always be 0 percent."

That's like saying sunshine would be at 0 percent as long as it's nighttime. There is no inflation without growth. Limit the availability of currency and you stagnate. That's not even considering the inability to finance a crisis.

The root cause of inflation is usury (usury is any unearned profit.) Most "money" is created by banks as loans, but the interest on that debt is not created.

To create the money to pay the interest, more debt must be created (refinancing). This creates ever larger payments that in turn drive ever higher prices for goods in order to service the growing debt.

The inevitable result is bankruptcy -- and this is where the bankers have taken us today.

People for a Mathematically Perfect Economy.

Inflation is caused by new money and new money alone. All other "causes" of inflation are not really "causes" but rather byproducts.

Let's say you run your own country and initially print X amount of dollars and never print dollars again. As long as you don't print more dollars, inflation will always be 0 percent. There are a limited amount of dollars in circulation and that number will not go up, so prices cannot go up simply because there aren't enough dollars in circulation to pay for it. Therefore, inflation is the printing of new money.

The U.S dollar is backed by nothing but the mere paper it's printed on. If you want real money, buy yourself gold and silver. Example: 1 US dollar can get you a haircut 50 years ago but not today. 1 ounce of silver can get you a haircut 50 years ago and can still get you a haircut today. The U.S dollar will fail. It's a matter of when, not if. Buy precious metals ASAP!

Please let me know how governments deal with inflation.

Well explained bonsai. To get a better grasp of how all this works I recommend a book called "Case for the Fed." It explains inflation first through the history of banking with the use of commodities and increasing trade traffic by creating receipts that amounted to more than what was actually backed by hard commodities.

I understand how the fractional system works and everybody keeps saying that this is because we have 90 percent of extra money out of the amount which was initially has been put into system.

So, if everybody knows the math behind it, just put 10 times less money as originally and you will get a result that you had in mind by this fractional system. So, why we complain about that? Why just not take it into account before injecting money into the system?

Thanks anybody who can clarify that.

1) Suppose the government does not print extra bills. Do we still get inflation?

2) What specific things the government can do so that there will be no inflation?

3) Why is the dollar value not higher than the UK pound sterling?

Saying inflation is normal-- is like saying having a heart attack is normal! Inflation is caused by governments using "fiat" currency. It steals more wealth then any thing else!

Inflation is only normal for "Fiat" currency. It is the worst form of taxation ever devised and rest assured it is a tax and it steals wealth every day!

This is a poor, inaccurate article about inflation. BOSI does a much better job in Post no 2.

WiseGeek is not wise.

"bosi" got it right the hard way. Inflation is simply too much money chasing too few goods. econ101

You might want to check the real world: there is no inflation going on in the U.S. now!

I think inflation is lame!

anon37597

I agree, Murry Rothbard is essential reading for anyone interested enough to want to know what the bankers are up to. Everything I've written about the banks anti-social wealth skimming schemes is on my website.

If you want a great explanation of the causes of inflation and the causes of it look up The Mystery of Banking by Murry Rothbard. It's a great book and explains everything.

What causes the rises in production causes, the rise in commodity prices and everything else if fractional reserve banking. Every time someone deposits money. Just say £1000 into a bank. Well then a bank prints up £9000 from nowhere. But not all banks work at a rate of 9-1. At the peak of the crisis Fannie Mae and Freddie Mac were operating at a reserve of 60-1. So extremly inflationary.

Also the massive printing of cash. To bail out Fannie and Freddie the US more than doubled the money supply by printing $900 billion taking the supply from $800 billion to $1700 billion. come september again they then trebled the supply by printing $1.2 trillion. This has already started inflation but it will take a while to work through.

We're going to be getting hyperinflation. Not in the millions of percents but hundreds.

To anon35415. The sad thing is, there is nothing you can do except spend less. You are right, inflation is abnormal, no one should ever forget that.

but i would like to know how to cope with it when the inflation is happen,save more money or invest my saving,so that i can be free when i meet it.

and my other question is that as the author mentioned the meaning of inflation is a rise in price that causes the power of purchasing of a nation to fall,i understand it as the price of commodties rise and your reasons are the normal causes,but i think that the inflation is a kind of abnormal rising of goods,is it right?

I do not accept that inflation is a 'normal' economic development, positive inflation may have been around for a long time, but it should never be considered 'normal'. In an expertly run economy inflation should be 0%, any rise and fall to this 'norm' should be considered failure, usually the failure of government. However, during the last hundred years or so, the takeover of the economy by the banks make it more likely that a significant level of inflation is now due to the failures or by purposeful design by the banking sector.

Of course the reasons for economic failure can be many and most governments will try to hide the real reasons. Inflation induced by governments is just another form of taxation, it's designed to stop people hoarding money and to provide an incentive to use the banking system, for it is only by hoarding surplus cash in a bank that the loss of purchasing power of money can be mitigated. The more money that is put into the banks the more money [credit] the banks can create using their magic money creation financial instrument known as 'Fractional Reserve Banking'.

A rise in production costs and production worker wages is not a cause of inflation. If the people who produce everything, in other words the wealth creators, receive more money then the rise in prices of goods is on average mitigated for this group by their higher income. The only element of society that would feel the effects of production price rises are those people who work in the 'non-wealth creation' sectors (banks, financial services etc), however this group has it's own established, anti-social procedures for increasing their income, all of which are inflationary.

Saying that inflation is also caused by international lending and national debts, goes without saying, this can be covered by a generalization that governments are the main cause of inflation, the article would perhaps have been clearer if the causes of inflation were listed under three headings:

1. Government inflation either induced by caused by design or by mismanagement of the economy.

2. Inflation caused by the financial services sector, which is almost always by design.

3. All other inflationary causes.

I am sure that causes under the headings 1 and 2 would far outweigh any causes that could be found to put under heading 3.

To bring these "things" back in balance, the value of the hard assets would need to double in price to $40 so that the value of money would equal what it did before the increase in the money amount available.

This sounds a lot like what those check-cashing places do. Funny how everything that's happened over the last 8-10 years all comes back to inflation and what's happening in the US right now.

I googled inflation because a friend said that the *next* thing we have to worry about (after the stimulus pkg is passed) is inflation and since my husband and I are on a fixed income we stand to lose a great deal if inflation gets out of control.

From what I gleaned from the article and the posts, we are already in a serious state of inflation and since my husband and I are more than keeping our heads above H20 at this point I may need to do nothing more than continue to be a wise consumer to weather whatever is ahead -- is this a fair assumption?

Thank god for people like you, finally i now know the cause of inflation, and in such a simplified manner, all the other sites had way too many information and terms which completely turned me off but you, you're awesome, keep up the good work. The info on war, it actually surprised me, :/ although i heard that war in creases prices and stuff a couple of times i didn't believe it, but now that i understand inflation, i know see why war affects everything, Thanks a million man!!!

in the 1980's great runup of inflation the US senate held an open group of sessions to help determine what caused this huge increase in inflation. Inflation hit 13% in Canada and interest rates when up to about 19%. All hell broke loose! Many people lost their homes as they could not afford to renew their mortgages for 19%. In today's terms, you would have to earn $150,000 per year to qualify for a $200,000 mortgage. Many people today have higher than that mortgages and so their yearly income would have to be much greater. As a matter of interest, only about 2% of the total Canadian or for that matter US population earn more than $150,000 per year so what I'm saying is that just about everybody would have to leave their homes behind and walk away. The banks would be left with homes that nobody could afford to buy so they would eventually have all their money tied up in property that nobody was buying. They would go bankrupt very quickly but before they did, the banks would call in many if not all their outstanding loans. Many business would have to come up with the money they borrowed to stay in business. When they couldn't (that's the reason they borrowed money in the first place) then they would go bankrupt trying to repay their loans. This lack of paying would bring down the banks one by one. The house of cards would snowball into a huge depression. To stop this, the central banks would try to pump huge amounts of money into the banking system to help them meet the demand from people wanting their money out of the bank. That would stop the bank from calling in all their loans and that would allow business to keep working. Now everything seems OK again. However, there is always a "cause and effect" and the effect of all this new printed money....money made out of thin air....is that...inflation would take off causing the cost of "things" to sky rocket higher. As a result a MacDonald burger might cost you $10 bucks and a bottled water $3. That coffee in Starbucks might end up costing $15. Who could afford that price? In the long run...nobody...because when your wage goes up to compensate for the higher costs of living, the tax man takes a piece of that money and that then leaves you with little or no extra money to pay those higher prices on a regular basis. The end result is constriction or belt tightening and nobody buys that coffee...or not enough to have those businesses stay in business. The business system begins to crack. Not the financial system which has been saved but the business system that doesn't have a "big Daddy" to pour money into it. The banks have been saved but the businesses pay the price. They lay off and that means that the people now pay the price. The ordinary person always pays the bills! What you're left with is reduced jobs but higher prices. An inflationary depression it's called!! In today's world...those jobs go "offshore" and will never come back.

That US senate meeting asked the country's financial gurus to identify the causes of inflation and everyone said it was the manufacture of extra money (out of thin air) and putting that money into the country's money supply. No other cause was identified. So just call up the country's money supply. In Canada, it's found in Stats Canada and you'll see that the central bank has been creating new money at the rate of about 12-14% per year for the last 10 years. Creating money out of thin air makes money worth less in purchasing power and that means that "things" go up in price to compensate. The "trickle down" effect is that the banks see the immediate effect on their balance sheets but the true cost that effects the people takes time to work its way through the business system to hit the people bit by bit through lost jobs and higher prices. Hence the expression "the poor get poorer" and the middle class pays the bills. Only some businesses go out of business as others adjust to the rising cost of doing business by merging and/or going off shore to produce cheaper. In all cases it means lost jobs and higher prices. When you're out of work it's a recession....when I'm out of work it's a depression. Words can't describe the terrible effect being out of work when you're middle aged or higher. The chance of getting work somewhere else is next to none. Nobody wants to hire "old people". That's why it's a depression to those older people when it happens to them regardless of whether or not the government just calls it a recession.

Stop thinking that increases in things cause inflation. Increases in things are the result of inflation. Simply put with all things considered...the increase in the money supply minus the growth in the economy equals the true inflation rate. If the money supply grows at 12% and the economy grows at 5% then the real inflation rate is the difference which in this example is 12-5 = 7%. Just follow total money supply growth and growth in the economy and subtract one from the other to see where we stand. When the figures don't show the true inflation rate like they haven't for the last 5 years then government conspiracy is manipulating the business system. In the end though it won't matter...inflation will bring us down.

“The value of money is determined by dividing the number of "things" available by the total amount of money available.”

Stan:

That is exactly what bankers and economists are saying. It took me some time to grab the essence of this statement and it is purely theoretical and used by bankers against government to issue money.

The explanation of this is very simple:

The moment someone says we need more money to do trade; bankers and economists are using this purely theoretical inflation formula to scare public and that is why they get away with so call tight budget that is causing recession, endless bankruptcies and homes foreclosure. Remember we do not know how many things are available and total amount of money available. Bankers pretend to know and use it to their advantage.

Artificial (oil) or real (food) scarcity of raw product is causing prices increase and hit the hardest those on fixed income like pensioners and welfare recipients.

Best regards, Stan

what is the cause of the inflation is saudi arabia? what are the effects?

"...Manufacturing money out of thin air eventually puts more money in the ordinary person's pocket yet this endless production of extra paper money...done by the central banks, does not require any extra effort on behalf of the worker so he ends up with more money in his pocket to buy "things" at no extra cost to him. That sounds nice but with more money to buy things, the money becomes worth less and to compensate..."

Manufacturing money out of thin air...is the only way to do it because money is abstraction like number. The major problem with money is who should issue it! *Not* any bank or any government but the buyer who is also the seller of goods or service. Inflation is only caused by the growing cost of raw materials caused by growing interest to borrow money. The increasing amount of money on the market does not cause inflation!

Make no mistake....There is only one cause of inflation and everything else happens as a result of that one major cause. In other words, everything else that happens becomes inflationary but not the cause of inflation. Rising prices are inflationary for sure but not the cause of inflation. Only the manufacture of more money than the total available yesterday causes inflation. Rising prices are a reaction to this extra money in the system. Manufacturing money out of thin air eventually puts more money in the ordinary person's pocket yet this endless production of extra paper money...done by the central banks, does not require any extra effort on behalf of the worker so he ends up with more money in his pocket to buy "things" at no extra cost to him. That sounds nice but with more money to buy things, the money becomes worth less and to compensate.... the "things" go up in price or else they would become cheaper for no real reason. The value of money is determined by dividing the number of "things" available by the total amount of money available. As the amount of money available increases, the value of "things" would go down if the system did not compensate by putting the value of those "things" up....hence an inflationary reaction to the extra amount of money available. This is not a complicated operation but rather hard to explain when money and the value of money are talked about. The value of money is different than the total amount of money available. The value of money rises or falls with the total amount of money available. If the central bank manufactures, out of thin air, more money than yesterday's total, then the value of money would go down...which would be seen as prices of "things" going up to compensate for the extra amount of money available.

For example...a country's assets equal $20 and the total amount of money available is $10. This would mean that each dollar is worth 2 units of assets and that represents the value of the dollar. Now the central bank makes another $10 out of thin air and now the total value of money equals $20 and if the value of the assets stayed at $20 then the value of each dollar would equal only 1 unit of the assets....a decline of 50% and a huge loss in purchasing power for the dollar. To bring these "things" back in balance, the value of the hard assets would need to double in price to $40 so that the value of money would equal what it did before the increase in the money amount available. I trust everyone hasn't fallen asleep trying to figure out what's happening. The hard asset rises in value to keep the balance intact. Said another way...it takes double amount of money to buy the same thing as before so the value of money is 1/2 what it use to be. That's inflation and the increased value of the hard asset is the inflationary result of that inflation.

Inflation can be caused by federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced. So what can be done about this and what will the disadvantages of such a step be?