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What is inflation?
We’ve all experienced it, but few people truly understand it. Because prices go up, we have the Hobson’s Choice of either paying that price or doing without. “The price is higher than the time before … why is it more?”
The most frequently given explanation is too much money chasing too few goods. If you had a bakery, with only so many baguettes to sell, you’d want to charge as many simoleons as you can and still sell out your supply. So you raise the price as much as possible — which is a business owner’s dream — until workers all across the country demand higher wages to offset the increased cost of living. Then the whole cycle begins again.
If the problem really is too few goods, why not just buy more stock from the factory? Or if you are the factory, why not just make more? That would make more affordable goods available. But a business has underlying expenses to pay, like those pesky workers demanding pay increases so they can have the same standard of living they had before.
All of the above is mostly true, but it ignores the elephant in the room — it’s the money itself that’s becoming less valuable.
Tracking inflation
In the USA — a country that keeps excellent statistics on just about everything — the cost of living went up 24% between 2020 and 2024. What does that mean exactly? It means that whatever cost you $100 in 2020 costs $124 in 2024 for the exact same thing(s). Is the thing being bought suddenly more valuable? No, it’s the identical item it was before — with maybe a few ******** changes so they can say “new and improved” or “extra strength” — but it’s basically the same product. (Or in the case of “shrinkflation”, it’s like 4 bags of my favorite candy costing $1 each — but the amount of candy in each is less, so I now need 5 bags to get the same buzz — however, since they’re still $1 per bag, I’m paying $5 instead of $4 for it.)
24% sounds like a lot, but 6% per year seems less — who couldn’t handle a measly 6% if they had to? However it’s the cumulative effect that bites you in the ***.
So governments try to obscure the data by only letting you compare the present to the recent past, not to what prices were back when you were buying candy. The way they do this is they take a “base year” and give that an index of 100. Then prior years are given an index of 97 or whatever to show the change. But only a few years are shown; the earlier years, if you can find them, use a different base year, so you can’t easily compare them. (Later on, I’ll give you a more complete table.)
And why is the money worth less? The main cause is deficit spending, the central government spending more than it takes in. How can you spend money you don’t have in the first place? It’s easy when you create the money in the first place. Just create some more. In the olden days, that would consist of firing up the printing presses and cranking out as many notes and bills as possible, like in Argentina today. This is called using the printing press, even in modern times when most money is in bank accounts fed by wire transfers, not with cash-in-the-hand.
Deflationary depression
I’ve often imagined myself as a hotshot economist speaking with the prime minister or president or whatever they call the head-of-state there, and say: “Do you want full employment? We can do that. Do you want stable prices without inflation? We can do that. Do you want them both? We can’t do that.” The reason is that unemployment and inflation are like the two sides of a see-saw; if one side goes down, the other side goes up.
The Great Depression that started in the USA in the 1920’s is an example of this.
I had this friend years ago, who was complaining about inflation. He pointed out on the news how the Federal Government was saying maybe inflation could be stopped. He said I don’t want to know when the prices stop going up — I want to know when they’re going back down again. No way, José, I thought. The only way prices could go back down is when the economy is slowed down enough so millions of people are thrown out of work. Then the cost of living would go down, and things would be more affordable, but only if you managed to keep your job. This is called deflationary depression.
So what to do? Many countries are trying to reach a compromise of a 2% per year inflation. Actually, the word they use is target, not compromise, but I don’t like that word because it makes it seem like somebody who works behind a desk likes inflation and wants to see it happen.
Buy now, pay later
The important thing to remember about inflation is there is always a lag between an increase in the money supply and a rise in prices. This allows governments to bring on the party now and leave the mess for the next administration to clean up. (Hint: when you want to know where inflation is going in the next few years, look at exchange rates and the price of imports. The lag there is much less.)
The Biden administration’s “spend a trillion here, spend a trillion there” strategy will backfire, but it will be up to the new Trump government to pick up the pieces.
Sometimes what’s important is not the rate of inflation, but when that number suddenly changes without warning. If inflation is steady, the change in the money’s value will be built into everyone’s pricing strategy.
But if we all are blindsided by a sudden jump in the statistics, it’s much harder to be prepared to deal with the damage.
Inflation’s winners and losers
If you have an outstanding loan that you took out before the inflation, or took out just before the existing inflation got suddenly worse, that’s to your benefit, because you get to pay the loan back with cheaper money. This is especially true with fixed-rate mortgages.
If you have to pay a tax bill, delay it for as much as you can, because you can pay it off with inflated moolah.
If you’re a member of a union, particularly in an industry like steel or autos, you can strike and easily get a huge pay increase to offset your increased expenses. But those who are not unionized — everyone from small bakery owners to doctors — will be unable to keep up. (Mostly, they will try to “fight inflation” on their own by delaying raising their prices for as long as they can, getting squeezed between their expenses and non-increasing revenue.)
Retirees will come out even if their monthly check is inflation-adjusted, while those that get paid a fixed amount per month will lose big. However, you can lose even with inflation-adjusted pensions, if by the time the index is adjusted, it’s already out-of-date.
Owners of bonds will be hurt bad, because the bonds will eventually be paid off with less valuable moolah.
What about the secondary bond market? Couldn’t you sell those bonds to investors looking to “buy” the company’s debt? In that case, you’ll find the price secondary buyers are willing to pay will crash hard. They have to look at the price the bonds will be at maturity, and how much inflation there will be between now and the maturity date. Their bid price will be low enough so they can recoup their investment by then.
While I’m at it, war bonds are the absolute worst investment possible. No nation wants to lose a war, so they finance their tools of the trade with as much deficit spending as they can get away with. By the time the war’s over, strong and persistent inflation will mean getting paid back in devalued money. Unless of course your side loses, in which case your bonds can suddenly become worthless.
Owners of gold coins and bullion and gold mining stocks tend to keep up with inflation, but keep in mind, there’s a speculative value to gold — the value of gold, even in non-inflationary times, tends to jiggle up and down for reasons of their own. Be careful of “accounts” where they keep your gold in their own vaults and send you a statement every month showing how much gold you “own”. Companies like this can and do go bankrupt, and if they stop answering their phone, you could possibly lose all of it.
The main disadvantage to gold is it doesn’t earn anything for you. No interest, no business profits, no anything. But it’s better than keeping your money in a falling stock market.
Another use for gold is for central banks to use it to “back” their paper money. When they do this, they promise to take your simoleons and give you gold at a fixed rate. This makes it impossible to inflate the paper currency past a certain point. 
In 1971, then President Nixon took the dollar off the gold standard, setting the dollar “free to float” among the various exchanges. This made it possible for the dollar to inflate, but restraint (not too much deficit spending) by the US government has kept the dollar reasonably secure.
Of course, if there’s already a steady inflation, then the above applies when the inflation suddenly jumps but no one was expecting it to.
Indexing
Indexing is when price and cost amounts are adjusted for inflation’s effect, based on the current cost of living. The national legislatures could pass laws enabling it. The problem is, not everything is going to be indexed. I could easily imagine a world where bank loans are indexed but bank deposits are not.
Hyperinflation
Hyperinflation is inflation at more than 50% per month and accelerating, as what happened in Germany 100 years ago. Hyperinflation has all the miseries described above, magnified, with the additional hassle of prices rising so fast it’s hard to do any business. If inflation means the money suddenly has less value, then hyperinflation means the money now has no value at all. (Think of store clerks running around every few hours putting new price stickers on everything from common baguettes to escargot. I often wondered why they just wouldn’t double their prices and then put up a big sign, 45% off everything — discount taken at register. Then all they have to do to change prices is change the sign. Of course, I would rather they not increase the prices at all.)
Price increases
Economists talk about the real value of something being what it’s value would be without inflation. In theory, that would stay the same regardless of how much inflation there was. For example, a subway fare being so many simoleons, different than years ago, but you get the same value for your money — because it’s real value hasn’t changed.
Sometimes the real value will change — like a crop failure pushing up the price of wheat, resulting in a shortage of baguettes. The price goes up, even without inflation happening at the same time, or goes up more than the inflation rate. I call these price increases to differentiate them from inflation-driven changes.
The cost of living
And now here is the long-term table of the cost of living index I promised you:
. year . index
. —- . —–
. 1913 . 3.14
. 1914 . 3.17
. 1915 . 3.2
. 1916 . 3.45
. 1917 . 4.06
. 1918 . 4.78
. 1919 . 5.48
. 1920 . 6.34
. 1921 . 5.67
. 1922 . 5.32
. 1923 . 5.42
. 1924 . 5.42
. 1925 . 5.54
. 1926 . 5.61
. 1927 . 5.51
. 1928 . 5.42
. 1929 . 5.42
. 1930 . 5.29
. 1931 . 4.82
. 1932 . 4.34
. 1933 . 4.12
. 1934 . 4.25
. 1935 . 4.34
. 1936 . 4.4
. 1937 . 4.56
. 1938 . 4.47
. 1939 . 4.4
. 1940 . 4.44
. 1941 . 4.66
. 1942 . 5.16
. 1943 . 5.48
. 1944 . 5.58
. 1945 . 5.7
. 1946 . 6.18
. 1947 . 7.06
. 1948 . 7.64
. 1949 . 7.54
. 1950 . 7.64
. 1951 . 8.24
. 1952 . 8
. 1953 . 8.46
. 1954 . 8.52
. 1955 . 8.49
. 1956 . 8.62
. 1957 . 8.9
. 1958 . 9.16
. 1959 . 9.22
. 1960 . 9.38
. 1961 . 9.47
. 1962 . 9.57
. 1963 . 9.69
. 1964 . 9.82
. 1965 . 9.98
. 1966 . 10.3
. 1967 . 10.6
. 1968 . 11
. 1969 . 11.6
. 1970 . 12.3
. 1971 . 12.8
. 1972 . 13.2
. 1973 . 14.1
. 1974 . 15.6
. 1975 . 17
. 1976 . 18
. 1977 . 19.2
. 1978 . 20.7
. 1979 . 2.3
. 1980 . 26.1
. 1981 . 28.8
. 1982 . 30.6
. 1983 . 31.6
. 1984 . 32.9
. 1985 . 34.1
. 1986 . 34.7
. 1987 . 36
. 1988 . 37.5
. 1989 . 39.3
. 1990 . 41.4
. 1991 . 43.1
. 1992 . 44.4
. 1993 . 45.8
. 1994 . 46.9
. 1995 . 48.3
. 1996 . 49.7
. 1997 . 50.8
. 1998 . 51.6
. 1999 . 52.8
. 2000 . 54.6
. 2001 . 56.1
. 2002 . 57
. 2003 . 58.3
. 2004 . 59.8
. 2005 . 61.9
. 2006 . 63.9
. 2007 . 65.7
. 2008 . 68.2
. 2009 . 68
. 2010 . 68
. 2011 . 71.3
. 2012 . 72.7
. 2013 . 73.8
. 2014 . 75
. 2015 . 75.1
. 2016 . 76
. 2017 . 77.7
. 2018 . 79.5
. 2019 . 81
. 2020 . 82
. 2021 . 85.8
. 2022 . 92.7
. 2023 . 96.5
. 2024 . 100
Source: usinflationcalculator.com
