INFLATION - FOR THE LAYPERSON

I can't stand inflation. Looking back over the last ten years, prices of pretty much every thing has gone up. Some more than others. The first time I filled gas in my own car, it cost around 50 cents per liter. Today we're edging close to triple of that.

So why do prices go up? Below are three observations I'd like to share. I have small kids, and like all kids, they are eager to learn, so I like to keep things simple and easy-to-explain.

1) To understand inflation, we need to understand the concept of money. I hope to write something next time about the evolution of money (for the layperson of course). But in short, if we lived in an economy with no money (barter economy) where people exchanged one item for another (example strawberries for milk), there would be no inflation! The "real value" of strawberries in comparison to the milk would forever remain the same.

If it was accepted practice to exchange 10 strawberries for 1 litre of milk in 1984, it would continue to be the accepted practice in 2018. Why? Because the intrinsic value of strawberries and milk would never change.

Imagine a world where "prices" never went up! A simple, yet intriguing, thought.

2) Today, we are using what is called FIAT money. In simple terms, this is paper money printed by someone. This is money that is not backed up by anything valuable. It is a currency that exists as a means of exchange only because an authority (such as a government) said so. A 5-dollar bill in-and-of-itself has absolutely no value other than the paper it is printed on, but it is worth "5 dollars" because the government said so.

Inflation very much exists with FIAT money.

If a box of 6 strawberries cost $1 in 2014, today the price of that box may have gone up to $2. We tend to think strawberries have become more expensive.

However, the intrinsic value of strawberries is always the same. What has actually happened is that some portion of your dollar has become worthless. That's why the same $1 that gave you 6 strawberries in 2014 can only give you 3 strawberries today.

Same thing, just from a different perspective.

Since paper money is not backed up by anything valuable, no one can stop your dollar from becoming worthless. Scary ... but entirely possible.

3) Finally, inflation is not by chance.

Think of Diamonds. They are precious because they are so rare and hard to extract. If they were abundantly available, they would be worthless.

If government chooses to print more money, they make it less precious and more worthless.

Why would they do that, you might ask? For many reasons, but lets just say, governments don't mind inflation as much as you (or I) do. Next time you pay extra for something in the market, notice how the GST (which is the tax government gets on that item) also goes up! That's more money for the government. More money in the pockets is never a bad thing, eh?

If only that was my pocket.