Inflation is a quantitative measure of the rate at which the average price level of selected goods and services in an economy increases over a period of time. As it is characterized by an increase in the cost of living as the prices of goods and services rise, it also reduces the purchasing power of each unit of currency, demand, supply, and expectations. Inflation hits at every angle of the economy: food prices go up, transportation prices increases, gas prices rise, and the cost of various other foods and services skyrocket over time. Ideally, an optimum level of inflation is required to promote spending to a certain extent instead of saving, thereby nurturing economic growth.


The Great Inflation


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Monetary Policy

  • One of the best ways to predict inflation is to look at workforce growth (2.5 year lag)
    • New works start to spend and require lots of goods, services, money, etc - they fuel the economy
  • Before central banks, inflation was relatively mild
    • House Prices in the US only rose 12% in the 19th century 
    • House Prices in the US only rose 50% from 1800 to 1913 (When US Central Bank Formed)
    • Previously most countries monetary policy operated on  the Gold Standad
  • Inflation is hidden tax on those who accumulate assets:  savers, retirees, annuitants and insurance policy holders

Inflation Triggers

  • Monetarists and Austrain Economists believe that Central Bank money printing (increasing money supply) causes inflatino
  • Population Growth (especially working age) - more demand for currency in the economy
    • Working age population consume a lot 
    • Having kids also requires significant consumption
    • Non-Working age are huge consumers (without any production)
  • Some believe that Inflation is now always driven by the money supply:

Inflation & Specialization = Good Thing (Harry Dent)

  • Specialization of Labor = More Transactions / Outsourcing = More Need for $ = Inflation
    •     We have to pay other people more money to do something than we could do it for ourselves
  • Specialization of Labor = Better Efficiency = Better Lifestyles = Good
  • Therefore:  Inflation = Good
  • Natural Inflation is a great economic indicator and sign of progress
  • However, unnatural inflation can be bad:
    • Massive Central Bank QE & Liquidly injections are like a drug
  • Compared to someone living remotely by themselves.  They do everything themself and have non need for currency:
  • Evidence:  Although there has been massive "inflation" in the US since 1900, inflation-adjusted wages and living standards have gone up far faster

Inflation According to Dr. Lacy Hunt