There is a number published by the Government called the Consumer Price Index (CPI) that tracks the changing prices of a set of products and services. The movement of the CPI from year to year is what defines inflation. Keeping inflation low is very important for economic policy because if inflation goes up, things get expensive. Even more important, it argues that the cost of money (i.e., interest on loans) can also go up. So if inflation goes up, it becomes harder to afford to borrow money.
A better way to look at inflation is to think of it as a measurement of the buying power of a dollar. When inflation goes up, your money is worth less. It can’t buy as much. This usually happens when there is too much money in the system. This often happens when a government needs to pay for something big. Wars, for instance, have always been major causes of inflation, but historically prices returned to pre-war levels, except when the Government adopted the idea of creating fiat currency out of thin air, a practice it started in the 70’s and continues today. The reason wars are inflationary is that the spending never leaves behind anything that can create more value. Build a bomb, and it blows up somewhere. Build a school or a bridge or road, and it will continue to help improve the community for years afterwards, helping businesses make things of value.
Now the question is, if excess money in the system causes inflation, how bad is it? The answer is that it’s worse than you’re being told. Starting in the early 80’s the Government began fiddling with the numbers used to define inflation. This practice continued through several presidential administrations.
Take a good look at this chart. If we use the same standards of inflation that were in effect in 1980, the current rate about 2% as we are told, but closer to 9%. Four and a half times higher. You’re not imagining it. Prices have been rising quite a bit for some time now. (by the way, shadowstats.com is a wonderful site for tracking this kind of obfuscation)
Another thing to keep in mind is that wages have been essentially stagnant since the late 70’s. With prices going up and income basically flat, how do you keep people from noticing? Easy. The Fed can literally create money just by writing a check. You create tons of money and issue it in the form of easy credit. Consumers, banks, governments all can now spend as they always have without worrying about prices. Of course, this is unsustainable; eventually it’s got to be paid back, with interest. This, I submit, is why we have so much trouble with credit both as individuals and as a nation. If the money is there, people will spend it, it’s less a matter of moral failing on the part of individuals. Although, to be fair, the bankers, their political allies, and moral defenders have no business getting righteously indignant against anyone about anything.
