boiled down inflation question

[Flasch186]

I know its probably not this simple BUT:

If inflation is going up, does that mean average Joe is making more money?

[WSUCougar]

Only if Joe's salary (cost of living raise, whatever) matches the inflation rate. And if you mean relatively, the answer is no.

[Daimyo]

Not unless Joe's percent increase in salary is more the percent increase in inflation. Inflation basically means that x dollars tomorrow will be worth less than x dollars today so if Joe's salary stays constant he actually loses money.

[George]

No, but it means average Joe can buy less with every dollar he makes.

[Flasch186]

...but isn't inflation caused by more dollars being in circulation? (again boiled down - im not talking about the basket of goods...trying to make it more simplified)

[CraigSca]

Ah, remember the days when "stagflation" was part of our vocabulary?

[digamma]

I'm definitely not an expert here, but there are two theories of inflation. One is monetary, which deals with the monetary supply. The other is output gap inflation, which looks more to supply/demand imbalances. So to answer your question, more money in circulation can cause inflation, but it's not the sole cause.

[George]

Inflation can come from several things, "loose" money being one.

[George]

I'm definitely not an expert here, but there are two theories of inflation. One is monetary, which deals with the monetary supply. The other is output gap inflation, which looks more to supply/demand imbalances. So to answer your question, more money in circulation can cause inflation, but it's not the sole cause.


Dola,

digamma said it very well.

[ISiddiqui]

...but isn't inflation caused by more dollars being in circulation? (again boiled down - im not talking about the basket of goods...trying to make it more simplified)

More money in circulation doesn't necessarily mean higher wages being paid (think of the "Jobless Recovery" for example).

[stevew]

www.wikipedia.org/inflation

[st.cronin]

I've always been amused by the principle that inflation is bad, but not as bad as deflation. It's like pessimism perfected.

[-Mojo Jojo-]

...but isn't inflation caused by more dollars being in circulation? (again boiled down - im not talking about the basket of goods...trying to make it more simplified)

In theory... but it's all funny money anyway with all the lending and rates and multiplier effects and international currency markets. If you want simplified it just means each dollar is worth less. So in order for the ordinary Joe to be keep making the same amount of money he needs to get a pay raise to compensate for weaker dollars. And in order for the ordinary Joe to be making more money he would need a bigger pay raise. My understanding is that these inflation-based pay raises typically lag inflation, so in general, ordinary Joe is making less money than when there is no inflation or inflation is low.

[Flasch186]

www.wikipedia.org/inflation


hence why i said "boiled down"...I cant explain it to someone in public by saying, "go look at Wikipedia."

[jonesz]

I've always been amused by the principle that inflation is bad, but not as bad as deflation. It's like pessimism perfected.

I'm always amused by this as well. Deflation is SO much worse than inflation. I always tell people to think of it this way: With deflation, it means that something that costs $1 today will cost 90 cents tomorrow. If something is going to cost less tomorrow than it does today, why would I buy it today. I'll just wait. Which causes the price to fall even farther. Which causes a vicious cycle that is extremely hard to break out of (just ask Japan). Thus a small amount of inflation is good as it will entice you to buy today as you know if will be pricier tomorrow. That's why economists go into shear panic mode anytime the "d" word is uttered.

[Desnudo]

hence why i said "boiled down"...I cant explain it to someone in public by saying, "go look at Wikipedia."

A very simple explaination is that increasing money supply can lead to inflation by devaluing the dollar. Since each dollar in circulation is now worth relatively less than it was before the increase, prices rise (inflation) to compensate for the lower value each dollar represents.

Edit: or flipped around, an increased supply of money increases demand for products which leads to price increases.

This leads to demand for more dollars which can lead to another increase in money supply to support the demand, which leads to an increase in prices. Rinse and repeat.

It's easier to see the effects in financially unstable countries where bad monetary decisions can have tremendous effects on inflation.