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How Does Inflation ACTUALLY Work?


If you have a conversation with your grandparents
about the price of anything, they’ll most likely say something to the effect of, “When
I was your age, I’d buy a bottle of Coke for six cents!”, or perhaps, “I bought
a house with a single entry-level job!” And that seems to be the memory of lots of
older people as they reminisce about their youth. It’s no secret that what a dollar can get
you has changed significantly over time. And these price changes aren’t exclusive
to decades ago. In January 2017, a whole chicken cost an average
of $1.42 a pound, according to figures released by the U.S. Department of Labor, Bureau of
Statistics. In January 2018, the price of that same chicken
rose by nine cents, or 6.3 percent. So what gives? Why would the same exact thing cost more at
a later time? Inflation is the rate of an increase in prices
for goods and services in an economy over a set time period. When the prices of goods rise, each unit of
currency has less purchasing power than before, so naturally, fewer goods can be attained. Inflation in the United States is primarily
tracked using the Consumer Price Index — or CPI — a tool developed by the Bureau of Labor
Statistics, which takes into account the pricing data for thousands of goods across the country. The BBC explained how the CPI helps us understand
inflation and changing prices this way: “If CPI is three percent, this means that, on
average, the price of products and services we buy is three percent higher than a year
earlier. Or, in other words, we would need to spend
three percent more to buy the same things we bought 12 months ago.” Conversely, there’s what’s called deflation,
which, as you guessed it, is when prices decrease because there are more goods available than
the amount of money circulating around to buy them. But not so fast! While prices dropping sounds like a dream
in Budget Land, deflation has been known to increase the likelihood of a depression or
a recession, so it’s also monitored closely and stopped in its tracks. The “why” behind inflation can be broken
down into three reasons — each of which will shed light on specific types. The first is when governments print more money. Governments will often do this to stimulate
the economy and create more jobs. More money can be put into circulation by
literally printing more of the physical money or by increasing government debt. A real-life example of inflation being caused
by the printing of more money happened during the Civil War era when the Confederacy printed
$20 million worth of treasury notes. To backtrack a bit, when the war started in
1861, one gold dollar cost one Confederate dollar. In just four months, the inflation rate rose
to five percent, and that number became a whopping 140 percent by 1863. To give you a better idea of how high that
was, inflation rates are typically two to three percent every year in contemporary times. What happened during this era, though, is
an example of hyperinflation, or inflation that’s increasing at an extremely high rate,
although this example doesn’t come close to what we’ll describe later. Hang tight. Another type of inflation is called cost-push
inflation. This is when the cost of maintaining a business
rises and then customers have to then pay more to help the business sustain itself. The reason behind the rising cost of maintaining
a business vary but are numerous — sometimes the cost of materials a business needs might
increase, employees might be asking for higher wages or land rents are getting higher. The last cause of inflation we’ll mention
is demand-pull inflation, or when the number of people who want a good or service increases
and supply isn’t increasing at the same rate. This sometimes happens when people are getting
richer and therefore have more disposable income. Consumers could also find themselves with
more to spend on goods and services when the government cuts taxes, which could cause this
type of inflation. So, who are the key players behind making
sure inflation doesn’t get too — inflated? These trusty masterminds can be found at the
Federal Reserve, the United States’ central bank who’s main purpose is controlling inflation
and preventing a recession. And the Reserve has a major say in the state
of the nation’s smaller banks — 80 percent of the 6,000 banks around the country are
part of a holding company, and this gives the Reserve a peek into the financial standing
of the country as a whole, according to the Federal Reserve Bank of St. Louis’s website. Several other countries have a central bank,
too, like the Reserve Bank of India, the Bank of England or the Swiss National Bank, to
name a few. A June 2019 article from TheBalance.com laid
out the various ways the U.S.’s Federal Reserve helps control inflation. One is through the use of contractionary monetary
policy, which enforces a reduction in government spending—specifically deficit spending. Governments enact deficit spending in the
hopes of encouraging economic growth. This spending would go towards medical supplies
and buildings, for example, which would then house businesses that’d hire people. Contractionary monetary policy can also be
implemented using what’s called open market operations, or when the Reserve sells securities
in the form of Treasury notes from member banks. When the Reserve sells these securities, banks
are then forced to buy them, reducing their capital and this gives banks less to lend
out to people. The final result of this is higher interest
rates on loans. The chain of events that make up open market
operations help slow economic growth and keep inflation on a tight leash. Next, the Reserve can also raise the reserve
requirement, or the amount of cash banks need to have in their possession at the end of
each day, which keeps money further out of circulation. The Reserve can also raise its discount rate,
or the amount it charges banks to borrow money in order to meet reserve requirements before
closing each night. Apart from contractionary monetary policy,
the Reserve also manages inflation by limiting the amount of credit allowed into the market
by using liquidity, or the degree with which money is available for investment or spending. This would make it more costly for people
to take out a loan. Phew! You get a huge pat on the back for following
along with that jargon-filled economics lesson. Ironically enough, the most important tool
for controlling inflation — according to Ben Bernanke, former chairman of the Reserve
— has nothing to do with this policy. He argued that it’s actually most important
to make sure people don’t anticipate inflation and then buy more of anything at a lower price,
because that, in itself, can spur inflation. He argued that it becomes a self-fulfilling
prophecy in this way. A cosmic theory when talking about something
so concrete like money, huh? We’ve painted a clear picture so far of
how inflation works in the U.S., but hyperinflation, when inflation rises by 50 percent or higher
per month, has historically played out — oftentimes catastrophically — across the globe. Venezuela and its mammoth of an economic crisis
will serve as our most recent example of this. So far, the largest amount of inflation we’ve
mentioned happened during the Civil War. That pales in comparison to Venezuela’s
situation — the inflation rate increased by 53,798,500 percent between April 2016 and
2019, according to Venezuela’s central bank. The International Monetary Fund projected
it would increase by 10 million percent by the end of 2019. We can use coffee to better explain what it’s
been like for the Venezuelans in the midst of this unrest: At the time of an August 2018
Forbes article about Venezuela’s hyperinflation, the average price of a cup of coffee had risen
to more than 2 million bolivars. That’d come out to more than 10 U.S. dollars
for just a single cup of joe. You can probably relate to the feeling of
spending a bit too much on coffee one morning, but this is the norm for Venezuelans, not
an outlier — not to mention that the coffee cost 1,400,000 bolivars a week before the
article and 190,000 that April. Venezuela’s hyperinflation is a symptom
of a much larger and seemingly uncontrollable economic problem, but it wasn’t always like
this. At one time, Venezuela, which was known for
its fruitful oil reserves, boasted wealth and stability. When Hugo Chavez became president in 1999,
oil prices went up and the government all of a sudden had more spending money. Then the labor strike at the oil company Petroleos
de Venezuela, which lasted from December 2002 to February 2003, had serious economic repercussions
— gross domestic product, or the monetary value of what a country produces — fell 27
percent during the first couple months of 2003. Chavez attempted to stop the decrease in the
value of the bolivar, but it just led to more problems. A currency peg, import controls, subsidies
for food and consumer goods — all of which happened after the strike — set up a scenario
for inevitable future inflation, according to Forbes. Fast forward to today, and Venezuelans are
still largely dependent on the government for goods and services, stores don’t have
what people need and black market prices for these items have increased. And the situation continues to be bleak: According
to the International Monetary Fund’s official website, the inflation rate is currently at
500,000 at the onset of 2020 and the writing of this script. Almost 7,000 miles away, Zimbabwe presents
another example of just how absurd and uncontrollable inflation has historically played out. Zimbabwe’s unrest can be traced back to
the late 1990’s when land reforms were introduced, some of which meant land was redistributed
and went from white farmers to black ones. They weren’t experienced enough to handle
these new farms and thus weren’t able to produce the amount of food necessary. In the year 2000, Robert Mugabe, its president
at the time, saw that his country was in economic turmoil and people were starving on the streets. The government mostly felt compelled to print
more money because of the war with Congo that was taking place at the time, and they needed
more to pay the soldiers. But other contributing factors included too
much national debt and not enough output as well as an overall lack of faith in the Zimbabwean
government. Back to Mugabe. The obscene amounts of money weren’t getting
invested properly, so there wasn’t enough production of new goods, and the purchasing
power of that money decreased. The next eight years were hit by inflation
to an astronomical degree, with results that make it hard to believe this happened in real
life. By 2001, there was a 112 percent increase
in prices per year. By 2006, it’d skyrocketed to 1, 218 percent
per year. To give more numbers to explain this, inflation
rose every day about 98 percent, so the price of anything would double in a matter of 24
hours. This all came to an end, thankfully, when
Mugabe officially legalized transactions in foreign currencies and the Zimbabwean currency
was rendered nonexistent in 2008. Want to know what are the best jobs you can
find that are also high paying? Watch this ‘Surprisingly High Paying Jobs’
video! And as always, don’t forget to like share
and subscribe! See you next time!

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100 thoughts on “How Does Inflation ACTUALLY Work?

  1. Can you guys do how to survive a Plane/Helicopter crash in honor of Kobe and his daughter along the 7 other passengers was there anything they could’ve done to survive ?

  2. Get your facts right about Zimbabwe, lt was caused by the governments racists policies to steal the property and land of white farmers. Causing shortages of food and other amenities.
    The sad parr is the anc government is doing the same as we speak, approving a bil to confenscate white owned property without compensation,the very same anc every body supported during apartheid,has the most raced based laws in the world. From employment,to starring a business to stealing someones property soley based on their skin color.
    Please do a video about black economic empowerment,raced based laws and conviscation without compensation,google tainted heros

  3. The government doesn’t print money, they have no say over the money supply however they can use fiscal expansion and contraction policy to aid GDP via changes in tax and government spending.

  4. The increase in government debt means you work longer and harder. That’s why the retirement age is constantly pushed further. Because guess who is the biggest holder of American debt? YOU.

  5. So, what if we had a deflation due to destruction of currency? Would the value of a given currency increase or stay at a similar rate?

  6. I study economics at the University of Pennsylvania and I approve this message! Next talk about opportunity cost or elasticity of demand.

  7. What about WW2 Germany, in layman's terms, 1 loaf of bread cost about 2B Reichmarks at least.
    1USD~5.70B RMs

  8. Too funny! I remember watching those movies of the week on Monday Nights…those women escape being battered with 8 kids. Become happy and successful, working as cashier at grocery store. Secretaries worked in the city, wore beautiful clothes.

  9. It do not work because money is a man made object. try giving a bear money when it about to rip you face off see if that helps

  10. I don’t believe inflation works economically but I do believe it works because poor people can tend to feel hopeless and if they start making more and buying more they’ll become happy again

  11. Inflation and deflation curiously always excludes 40% of the total wealth held by the rich and thats not the money that comes in every year they make and put out, its their savings thats constantly rising.

  12. Higher prices for goods and services means the general public must work more hours to maintain their living standards which means higher productivity for business activity that can promote higher consumer activity thus higher demand for goods and services eventually pushing higher inflation rates and higher prices again for goods and services. Inflation is just a vicious cycle where we run around in a hamster wheel chasing an illusion of financial security. No wonder work-life balance is non-existent in the 21st century. Employment is just a life sentence of obedience, extortion, and involuntary silence only to earn the privilege to participate in the corrupted world of economics and money mechanics. An economy can still be productive and have business and consumer activity without having inflation. Japan is a case study where it is still a productive economy with business and consumer activity and it has deflation or stagflation. Resources are still available and reasonably priced. It is just that the tool we use to exchange goods and services, aka paper money (bank note), has eroded in its purpose of retaining its intrinsic or representative value.

  13. Badly. Pass this along to the leftist Democrats who want this (socialism). 3:03 Rising Costs- 1) Cost of Materials 2) Higher Rent 3) Higher Wages 4) THEFT !! 4:16 Federal Reserve Do Nothing !! Stop going to the government for anything !! The Recession of 1921. The only stock market drop where Gov did nothing and the American people were better for it.

  14. This doesn’t prove the fact that if you’re going to buy an apple device one year later it will be much more cheaper. And that’s why many people are excited to watch the Apple iPhone Keynote that is held annually in September .

  15. I've seen people guesstimate a currency's worth by looking at the prices of various things in historical documents from a specific period, but has someone made a concerted effort to figure this stuff out?

  16. 2017: House plant costs 1$.
    2020: House plant costs 20$.

    4024: House plant cost 999999999999999999999999999999999999999999999999999999$.

  17. Why do you make deflation sound bad? It does cause what you say but it’s a necessary part of even your stated economic mind set. You can’t have eternal inflations because inflation only goes up. there must eventually be a deflation, otherwise there will be more monetary value. once you’ve started inflation you cannot stop if you wish to prevent deflation. because when you stop inflating, the market in a sense trys to fix its self by deflating so it can return to its original track.

  18. So basically the government does not need to work for more money because they may print it but we do need to work for more money

  19. I hate that this video is abruptly interrupted by ads 3 times! I get it that you need ad money but showing an ad out of the blue like that disconnects me with trying to understand the topic presented.

  20. First time I already knew everything in an infographic video thanks to AP Macro ✊🏽✊🏽 shoutout Mr Clifford 😤

  21. Funny how infographics tiptoed around telling the fact that Chavez ran his campaign on socialism, and after Chavez implemented socialism Venezuela’s extreme inflation started soon after. They at least mentioned how the citizens are completely reliant on their government, (even though now they are on their own, because the Venezuelan government can’t even help their own people in simple ways anymore, such as feed them, and keep them alive) they just refused to say how real socialism caused the extremely poor state they are in today. It’s obvious infographics is left leaning, but I love it because it mostly stays in the middle, and speaks truth, but more, and more, y’all are not speaking truth if it hurts the left in any way, and tiptoe around the truth. Infographics, y’all are close to pushing me away.

  22. It is NOT an increase in prices!!!!!!!!
    Inflation is the loss of buying power of a currency(being US dollar or any other)

  23. Inflation is always and only a monetary phenomenon.
    If someone tells you that is multicause or anything else they are wrong and or liars

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