INFLATION 💵

What does inflation in economics mean?

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of the currency is falling. When you dive deep into this problem you will face terminologies like GDP (Gross Domestic Product), CPI (Consumer Price Index) etc. Forget the jargons, let's get practical. If you have a closer look at the problem, according to Economics, what is the primary cause of increase in the price of products? 2 things, Demand-Pull and Cost-Push. Demand-Pull occurs when the aggregated demand for goods and services rises more rapidly than an economy's productive capacity. A typical example will be the produce, most agricultural produce has a seasonal yield and during the off-season of the produce it's price will be risen because of the scarcity of its availability. Cost-Push, on the other hand, occurs when prices of production process inputs increase. Consider you're a tomato sauce manufacturer, due to some reason or the other the cost of tomatoes has risen. As a ripple effect, the cost of producing the tomato sauce increases and you will be forced to increase the price of the sauce to keep the profitability unaffected.

In 1979, one guy in the United States, fought against inflation single handed and gave a different perspective of viewing this problem. He was Paul A. Volcker! He served as the President of FRB, New York from 1975 to 1979. Following a sharp rise in inflation (10% a year) between 1978 and 1979, President Jimmy Carter nominated Volcker to become chairman of the Board of Governors. Volcker's idealogy to cut Inflation was different, the increase in the price of goods and services is due to the availability of abundance money with the people for disposal. Until then all the efforts of the Federal Reserve was increasing/decreasing of interest rates which had minimal impact on Inflation. Volcker's first step was to stop printing any more money and letting them circulate in the system. This decision of Volcker was criticised global as this would infact put a cap on the nation's growth and businesses. Banks will not have excess money to loan out for companies and small-scale businesses to facilitate growth. Companies were forced to either cut the pay hike for the existing employees or let go of employees to cut their excess cost. As a result of this, the unemployment rise up to 7.5% ⬆️ and Volcker was considered as a national enemy by most of the US population. Car dealerships were unable to sell cars, Realtors were unable to sell their houses as Banks were unable to give loans to people.

Did Volcker's decision do good to the economy? initially it was a BIG NO! Inflation rose up to 14% ⬆️ from 12%. What was preventing things from happening, changes being made, it was human being and emotions. Human being and our emotions take a long time to change, people believed inflation to be part of the nation's economy and nothing's going to change their life. Eventually it happened, by end of 1981 more than 2 years after Volcker's reform, people started believing and Inflation dropped from 14% to 4% ⬇️. With 2 years of the worst recession US ever faced, inflation dropped and economy started building up. Inflation in 2016 in US is basically non-existence, with an annual rate of 0.2% 🤩. Currently US economy functions at 2.8% in 2018 which is controlable.

Just some stuffs I learnt through podcast and surfing the web, knowledge I needed to share 😀