Inflation (Finance)

"Inflation is defined as the increase in the price of goods and services over time. While some small-and-steady amount of inflation is normal, a significant increase in the inflation rate can lead to serious economic trouble. The problem with inflation is that it reduces purchasing power; if an individual or business is making the same amount of money as before and goods now cost more, that individual or business is getting a lot less for the money. This is why people often speak of receiving annual raises at work to “keep up with inflation.” Healthy companies generally provide their workers with an annual pay raise that corresponds to the inflation rate so that employees can maintain the same purchasing power, even if the price of goods goes up. During normal economic times, the inflation rate is usually small and consistent, but sometimes circumstances arise to artificially inflate or even deflate prices, such as a sudden increase or decrease in the availability of cash or credit."

DiLascio, Tracey M. “Inflation Overview.” Salem Press Encyclopedia, 2018. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=t6o&AN=89158224.

What Drives Inflation?

There are various factors that can drive prices or inflation in an economy. Typically, inflation results from an increase in production costs or an increase in demand for products and services.

Cost-Push Inflation

Cost-push inflation occurs when prices increase due to increases in production costs, such as raw materials and wages. The demand for goods is unchanged while the supply of goods declines due to the higher costs of production. As a result, the added costs of production are passed onto consumers in the form of higher prices for the finished goods.

Demand-Pull Inflation

Demand-pull inflation can be caused by strong consumer demand for a product or service. When there's a surge in demand for a wide breadth of goods across an economy, their prices tend to increase. While this is not often a concern for short-term imbalances of supply and demand, sustained demand can reverberate in the economy and raise costs for other goods; the result is demand-pull inflation.

The Investopedia Team, (2021, June 9). What Causes Inflation and Who Profits From It? Investopedia. https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp.

MeasuringWorth.com

Have you heard people - especially the older ones in your family - compare the cost of something to what they remember it being when they were younger? They might say, "I remember when I could get a bottle of soda and a snack cake for a ten cents", or "I remember when stamps cost only five cents!", or "The price of my first house was less than that car costs."

MeasuringWorth.com is a service for calculating relative worth over time. The website uses historical data to compare prices from prior years to what they would be in today's dollars.

For example, how does George Washington's salary compare today? 

"George Washington was paid a salary of $25,000 a year from 1789 to 1797 as the first president of the United States. The current salary of the president is now $400,000, to go with a $119,000 expense account, a generous pension and several other benefits. Has the remuneration improved?

"Making a comparison using the CPI for 1790 shows that $25,000 corresponds to about $720,000 today, so current presidents do not have an equal command over consumer goods as the Father of the Country. (Of course, Washington had to travel by horse drawn carriage, not helicopters or Air Force One.)

"When comparing Washington's salary to an unskilled worker, or the measure of average income, GDP per capita, then the comparable numbers are $15 to $37 million. Granted that would not put him in the ranks of the top 25 executives today that make over $200 million. It would, however, be many times more than any elected official in this country is paid today. Finally, to show the "economic power" of his wage, we see that his salary as a share of GDP would rank him equivalent to $2.8 billion."

Samuel H. Williamson, "Seven Ways to Compute the Relative Value of a U.S. Dollar Amount, 1790 to present," MeasuringWorth, 2021 www.measuringworth.com/uscompare/