What Causes Inflation?

what-is-inflation

Are we in an Inflation now? YES!

Update: August 2022. This past July, inflation in the US hit 8.6%, that is for that month NOT the year! Thus, we are in one of the highest inflation rates in US history and in the world now. Yes, we are in a “Stag Inflation”

chart1-inflation

How did we get this way?

Simple. Let’s do what the US government did in the late 70’s and expect different results. Incompetent government leaders with an inability to respond while putting the blame on non sequitur issues.

The cause: Out-of-control government spending with nothing to show for it. Cutting off supply chains, cutting off oil pipelines, and contradictory regulations. All this is in conjunction with COVID supply disruptions and unfair trade regulations. Then we have higher food production prices from crop failures, bad pesticides, severe storms in the east, and a drought in the west. Then as people are going back to work, higher demand for goods and services than in the past two years.

inflation 2022

What can turn Inflation around?

The opposite of what the government is doing now!

Reduce spending! Keep the Federal Reserve rate low with a “Discount Rate” for small and medium-sized businesses, so borrowing money for business is cheap! Open up oil drilling in the US for at-home markets, and reduce the regulations so the business can generate their products. Create better trade deals with nation-states such as more open markets and new and better supply chains. Reduce health care costs with deregulation and common sense practices.

From 2020; the seeds of what is happening now:

What Causes Inflation?

This is a question we have received a lot lately, will there be inflation because the Fed lowered the rates?

It is too early to tell; however, all signs show no. Unless, the government continues its ineptness and does not respond to the COVID-19 effectively. Then, if they decide to make everything worse by treating the problem through printing more money, then yes, we will have inflation.

What is Inflation?

Inflation is the rising rate of prices of goods and services in an economy that goes up beyond normal levels and reasons.

How does Inflation Happen?

Inflation happens when the increases in production costs of manufacturers causing them to pass their higher prices onto consumers. Then, wages and other commodities also rise in response. It can also happen when a rise in demand for products and services, as customers are willing to pay more for goods and services.

How Did the Great Inflation Happen?

The great inflation or hyperinflation in the 70’s was caused by many factors, creating a synergy of a perfect storm for it.

inflation

Inflation is always a product of wars and tough times. However, when the United States went off the gold standard in 1933 to reduce the Depression and as a protection to consumers when creditors demanded payment in Gold. This started a series of events that devalued money. This was not a problem at first. However, after that, the Fed completely severed the link between the dollar and gold in 1971. This resulted in the devaluation of currency. When they started making money as “Federal Reserve Notes” that money had no real value; consequently, prices went up drastically. In addition, the more dollars that are in circulation, then the value of each dollar are worth less. Therefore, by going off the gold standard, our money had no true backing. It is just a promise to pay from the government.

gold inflation

If the government is strong and wealthy, it is usually okay with minor price rises. If the government is corrupt and or week like Mexico and Venezuela, then there is out of control inflation. In the 1970’s the US government was weakening in military, economic and political strength. It started to ease when the American people became fed up and elected a strong leadership in the early 1980’s. By strong, purposeful governance, which inspired a growing economy.

inflation coffee

In addition, these other factors came into play:

  • A costly long-term war in Vietnam came to an end, alongside the treat of impeachment and resignation of the President left the county in uncertainty and the economy in a recession causing poor economic growth and high unemployment.
  • Then, oil prices went up, causing cost-push inflation, then there were oil shortages resulting in economic chaos.
  • Then, currency speculators alongside of corrupt and greedy businessmen caused further chaos on Wall Street.
  • The Fed’s response was to lower the rates, then upped them to 20%.
  • On top of all that there were problems in the blue-collar sector with rapacious union leaders and disappearing pension plans.

inflation graph 2

All of this was overwhelming the American people, and this is what caused hyperinflation.  And, the true cause of inflation was the government’s response; worthless money because of no gold standard and then they decided to print more money!

inflation unemplyment

How to effetely stop inflation and improve the economy? Simple, cut spending, stop printing excess money and go back to the Gold Standard!

https://www.bbc.com/news/business-61569559

https://www.clevelandfed.org/our-research/center-for-inflation-research/inflation-101/what-is-inflation-get-technical.aspx

https://www.brookings.edu/blog/up-front/2021/11/16/what-does-current-inflation-tell-us-about-the-future/

https://www.washingtonpost.com/us-policy/2022/01/26/inflation-white-house-experts/

https://www.imf.org/en/Publications/fandd/issues/2022/03/Future-of-inflation-partI-Agarwal-kimball

https://www.bloomberg.com/news/articles/2022-03-10/u-s-inflation-hits-fresh-40-year-high-of-7-9-before-oil-spike

© 2019, 2022; Dr. Richard J. Krejcir

Dr. Richard Krejcir is a licensed and experienced Financial Consultant with over thirty years of experience. He has worked for major banks, insurance companies, nonprofits, and families too. He is also an author, pastor, Special Ed Teacher, and financial blogger and holds a doctorate in Stewardship.

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