Survival Automatic Inflatable

Survival Automatic Inflatable

Inflation, rate of inflation, rising prices and what is what…really

"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services"

It is a Well-known definition of inflation by 2011.

Inflation is expressed by "rate of inflation" measured by two major indicators

CPI (Customer Price Index)

PPI (Producer Price Index)

We will focus on the CPI for now.

The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

In Ireland, consumer prices are measured by ONS (Office for National Statistics)

CPI is constructed in few simple stages

1. Fix the basket.

There are many goods measured by ONS. These include typical consumers goods like

Food, utilities, transport cost, clothing, durable goods, health and education.

2. Find the prices.

The second step measures the actual price in a given period of time. This is done via a system of extended surveys among citizens.

3. Compute the basket cost.

This step takes care of the overall price of all goods in the basket. Prices and quantities are summed up, keeping the quantities constant.

4. Compares to the base year to calculate the index – and finally…

5. Calculates the rate of inflation by comparing prices to the given base year, expressed in %.

If we have two of each – hot dogs and hamburgers at a given time at a given price;

 
Hot dog
hamburger
2004
$2
$3
2005
$4
$6

 

So we can calculate the cost of the basket;

2004 (2x$2) + (2x$3) =$10

2005 (2x$4) + (2X$6) =$20

Let's take 2004 as a base year and calculate the price index in each year

2004 = $10/$10 = 100 – CPI in the base year is always 100

Than we can calculate other year's CPI using the formula;

CPI2005 = (CPI 2005 – CPI 2004) / CPI2004X100%

CPI2005 = ($20 – $10)/1×100% = 100%

Inflation rate in 2005, with 2004 as a base year is 100%.

It means that prices doubled in 2005.

This is a simple measure widely used by officials, although there is more to inflation than CPI…

The reality is that inflation is not a general rise in price at all.

It is simply, as the name suggests the expansion of money supply in an economy. The general rise in prices is the effect of that phenomenon. We must not forget that inflation and the rate of inflation, measured by the well-known index called CPI (Customer Price Index), are completely two different animals.

People tend to say that inflation rises in an economy. The true fact is that the rate of inflation rises.

The inflation is a cause and the rising prices are the effect of money expansion in circulation.

When a certain amount of new money enters the market, thus diluting the existing supply, the general prices of goods and services rise. You can imagine that now more money chases the same amount of goods and services. The purchasing power of your euros goes down and prices go up.

Now you need more money to purchase the same good and it does not make you feel any happier.

It is a basic principle of supply and demand, where one is a seller and other is a buyer.

"The supply of each producer creates his demand for the supplies of other producers"

Jean-Baptiste Say

The equilibrium between the amount of money in an economy and the amount of goods needs to be satisfied on an aggregate basis. New money or credit do not create real demand for real- tangible goods and it does not add any new production. It is causing prices to rise and diminishes the purchasing power of your money.

"A stable economy has a balanced relationship between the supply of the money and the amount of goods and services. Certainly, within this framework, demand for individual goods and services can rise and fall and cause prices to rise and fall"

 

Peter Schiff Crash Proof 2.0

Taking it further we can argue that an extended money supply sends false incentives to the economy causing resources to be badly allocated. This misallocation will cause overheating in some areas creating bubbles. Artificial demand supported by cheap money and not genuine supply.

A prime example is the recent real estate disaster. Investors and speculators were attracted by no risk mortgages guaranteed by governments, subprime schemes, artificially low interest rates. Many over invested in the sector bringing down the banking sector with it.

Some people would argue that inflation (rising prices) is explained by genuine economic growth. Can you see any growth since the collapse of 2008? No!

The question is, how come we have rising prices during boom and during recession?

This fact proves that inflation is not created by economic growth at all.

The government creates inflation by expanding money supply to artificially create growth.

Free market principles should bring prices down.

If you come back to the simple principle of a consumer's willingness to pay for certain goods and competitive firms in the market, there is a relationship between how a firm maximize their profits using the principle of the marginal cost.

Assuming that we operate in genuine free markets, with no government intervention, we notice that firms make supply decisions based on marginal costs and market's real demand.

All firms produce at the efficient scale, prices equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price.

Both curves are closely dependent and any abnormality from equilibrium will cause firms to go out of business.

No business will produce goods which are unwanted by consumer, unless they are government bodies.

In a free market there is no explanation for random price hikes. If prices go up, demand decreases causing firms to cut supply or to go out of business. Firms to survive competition will drive prices down not up. Therefore in free capitalism and a healthy, dynamic economy (increasing GDP), we should have general prices falling instead of constantly rising – right?

Free genuine competitiveness and working on marginal cost principles will fight for customers, decreasing costs of production and the price of products.

Electronic devices industry is an excellent example of this.

Have you ever though how come all electronic goods are every year cheaper and better quality?

How much was a flat screen TV in 2005?

How much is the same TV today?

So who creates inflation?

Inflation is being created by our governments.

If you think about it for a minute, inflation is an easy way to run the country. Rising prices are nothing else than another tax imposed on citizens to sponsor all sorts of public expenses like

the Cold war, landing on the moon (before USSR), Vietnam War and poverty campaigns in the sixties.

• It makes a national debt cheaper as you can repay it with freshly printed money,
• It makes all social programs cheaper,
• It causes all major assets, stocks, real estate more expensive, creating an artificial picture of overall wealth,
• Income taxes are indexed for inflation using CPI index,

 

Inflation allows to keep interest rates artificially low, making money cheap and accessible to all. The effect of this manipulation we saw as a bubble in real estate and other asset classes having terrible consequences and bringing whole nations to the verge of collapse.

Since currencies are backed by nothing anymore (Nixon closing "gold window" 1971), there is no limitation in production of "fiat" currency.

The governments are in business to keep money flooding. They produce a false picture of growth and using money expansion, create non-existent demand. This does not match with the market supply and causes prices to rise.

They call inflation a side effect of economic growth and the tradeoff for well-being.

The opposite is true.

Genuine economic growth drives prices down.

This political manipulation has huge implications worldwide. The policy maker's behavior sends false signals to investors and businessmen all over the economy, causing them to allocate resources in a less efficient manner.

Federal Reserve Chairman Bernanke and his reckless money printing practices called Quantitative Easing (QE) causing other nations' collapse.

Riots in Egypt, surging commodity prices all over the board are the best evidence of massive money printing going on. Prices do not rise from the thin air in the recession environment.

Those practices will cause more damage in the nearest future.

The fact that importing countries to US have "an obligation" to peg to dollar forces them to buy US treasury and print their own currency to maintain exchange rates. It is a negative effect of extended money supply.

At the moment inflation in china is at 12 %.

The US, dependent so much on imports from china, is able to export freshly printed bucks and get away with hyperinflation at home, for now at least. Imagine what is going to happen if inflation reach 20% in china and people will go on the streets of Beijing?

The Chinese government will have to stop buying US treasuries, stop pegging to dollar, stop printing RNB and stop exporting to the US all together. All dollars automatically come back to the US causing runaway inflation on a scale we have never seen before.

It is just a matter of time. Obama gets thick with the Chinese people and threated them with embargos and all, but really, Chinese are better off without exporting to the US.

Imagine what is going to happen to Irish exports when the US will have to default on their liabilities?

 

Inflation is a very dangerous weapon created by greedy politicians' against their own people.

This tells me only one thing; this is no free market capitalism we live in.

If we had free market forces in play – there would be no oil shocks, bubble dot com or property boom and crash.

If we had genuine growth, there would be no IMF bailout for Ireland.

And we would not have ECB raising interest rates sometime soon, fighting inflation and bringing even more financial pressure on Irish households.

They should have known better.

About the Author

Invest in real, genuine economics of the future.Real economics from nuig