Ever wondered why your Mother's first
job paid her only $600 for the entire month and yet the entire family was living comfortably?
While you on the other hand, finally being able to work and receiving a pay
of $1,800 on your fist job which is 200% greater than what your mom got paid
a few years back could barely manage to budget even your gas which serves as
your lifeline from that next pay. The culprit behind that is inflation.
Inflation is the steady rise in the general price level of goods overtime.
That $600 pay your mother was receiving has the same buying power as $2,300
this present time. That means your mom is actually getting paid more on her
fist job than you do if that amount is adjusted for inflation. Look at it this
way, you could buy a gallon of gas for $.80 or a Bigmac meal at McDonald's for
just $1.25 at that point in time. To make things simple, inflation is the result
of an increase in the amount of money which causes goods to rise with it but
unfortunately prices of goods tends to rise faster than the amount of available
money in circulation. When the supply of something is way too much its value
per unit decreases. How do you value a single unit of grass? virtually zero
since its everywhere, compare that on how you value a pink diamond, the worlds
(US Department of Labor)
An increasing money supply puts an upward pressure on prices. Lets say everybody
in the country is getting paid $1000 a month and the cost to buy milk is $5.
When everybody's salary has increased 100% to $2000 the value of that milk relative
to everybody's income is now cut in half so sellers would just try to make it
fair by raising the price of milk to $10. This example is of course exaggerated,
but in real terms, that is what happens to people's minds unconsciously. Everybody
wants to get treated fairly so if they sensed that the scale isn't balanced
the market corrects it automatically.
Factors affecting the general money supply is the monetary policy set by central
banks or governments, the degree of scarcity for a good and we can say the general
rise in population. When you were younger or still peeing your pants you don't
need that much money to survive, you just depend on your parent's current income
as you're already covered inside it. As you grow older and finally being able
to work, your company pays you money which is then used to pay for your personal
expenses. We can now say that the amount of money needed has doubled because
you now have your own need for cash outside your parent's current income which
they are still receiving on top of your own earnings. Multiply that to the number
of families that has the same scenario and we can see that the amount of that
paper you hold in your hand has got to increase in quantity to prevent a shortage
due to a newbie like you finally receiving pay but of course the effect of doubling
the supply means it would be less in value per unit. However inflation can be
said to move in lockstep with economic growth as an expanding economy's rising
demand triggers for more supply causing inflation. Therefore inflation is a
natural monetary phenomenon.