I always hear people taoking about inflation.
Gas is cheaper then it should be if you account for inflation.
My payraise doesnt keep up with inflation.
Inflation is higher this year the last.

Whatever it may be. But what exactly causes inflation? Why is it my dollar buys 3% less today then it did one year ago? What changed? I understand market changes such in housing, but I dont see how something thats relatively static can change it value every year without fail......
If you assume 3% inflation, then a car that cost $10,000 in 1980 would cost approximately $20,000 in 2000. Why? Aside from changes in process which add to cost, WHY does it cost more now then it did then??

money hungry bastards

Inflation is caused by more money in circulation.  Look at those countries that try to solve their economic problems by printing more money.  The money becomes worthless.

However increasing money in circulation also promotes more spending.  Its a balance and tradeoff.  You can't just print off a trillion extra $20 Bills and the economy to take off, but a slight increase in the number of bills in circulation will boost the economy.

Inflation can also happen if the public perception of money is lost.  Say in a warzone money isn't really worth a lot.  Guns ammo and TP are.

This is simplistic of course there are a whole host of other factors that influence the economy.

Edit:  I think the average inflation rate for the US historically is 2% a year if you ignore the big crashes and recessions like the 70s (stagflation) and the great depression.

It amazes me how money can be created out of thin air.  For example, say you bought 10 registered M16's back in 1986 for $1,000  a pop.  Now they're say $15,000 a pop, you made $140,000 for doing nothing

Or buy 1000 shares of a stock at $1 and bam! They go up to $10 a share, same thing.

Works going the other way too, buy a stock at $10 now it's worth a $1.00.    Your Beanie Baby collection falls in value just sitting there.  A new car loses 10% of it's value once it's driven off the lot.

As stated above, it all has to do with how many pieces of paper (bills) are in circulation.  More pieces of paper in circulation, and a loaf of bread is going to cost more pieces of paper.  Less pieces of paper in circulation, and a loaf of bread will cost less pieces of paper.  It's all arbitrary and controlled by the Feds (Congress, Treasury, and Fed Reserve).  Even precious metals are arbitrary in value, which is why having a gold standard really doesn't help matters much.  They have a value that we (people) assign them.  Granted, the values of the precious metals may not change as drastically as a piece of paper, but they are still arbitrary.  

From what I understand, the Fed Reserve has a built in 5% per year inflation expectation.  Originally, I suspect this was to account for 5% of the money coming out of circulation due to being lost, damaged, destroyed, etc.  However, in modern times, with more electronic funds in the picture, the money is not coming out of circulation, which means inflation.  Don't know that for a fact, it's just my guess.

Quoted: money hungry bastards

True all too often...

Inflation is defined as an increase in the money supply. The Federal Reserve prints more money and viola we have inflation.



(and the $100 you had yesterday ain't worth $100 no more)

Simplest explination...

The first steps are always taken because of FUD*. The snowball just grows and rolls from there...



* Fear, Uncertainty, and Doubt

Inflation is where the aggregate level of prices goes up and deflation where the aggregate level of prices goes down. Inflation will occur if V and T remain constant but M goes up, i.e. the supply of money increases without any other changes. Inflation can also occur if V goes up (people spend money more quickly) or T declines (the economy shrinks), as the other variables are constant. Most inflations, however, occur because of independent increases in the money supply. That can happen either with commodity money or credit money. A flood of silver from the New World caused a devastating inflation in 16th and 17th century Spain; and gold strikes in California, Australia, South Africa, and the Yukon produced inflations in the 19th and early 20th centuries. Now inflations are always the result of increases in the supply of credit money:  it is easy to print paper, and governments that have begun issuing paper money have always eventually fallen to the temptation of just printing and spending new money.[4] Paper money achieved legitimacy in the first place only because the Bank of England, which was privately owned (founded in 1694 and nationalized in 1946),[5] was the first note issuing agency in history that behaved responsibly and restrained its issue of paper money. Consequently, Bank of England notes were "as good as gold." Inflation does not occur because of a "wage-price spiral," an "overheated" economy, excessive economic growth, or through any other natural mechanism of the market. A government debasing the currency would not have fooled anyone a century ago. Now, through deception, a government can try to blame inflation on anything but its own irresponsible actions.

Three answers.  They Keynesian's (not totally discredited) explanation was that inflation was either demand-pull or cost-push.  Cost-push is when something (like oil) gets more expensive and drives up the cost of everything.  Demand-pull is when consumer demand for an item (like housing or gas) is so great that the supply cannot keep up and prices rise.

The neo-classical explanation (mostly accepted by main-stream economists but not entirely proven) is that more money added to the economy by the central bank causes all inflation.

GunLvr

Quoted: Three answers.  They Keynesian's (not totally discredited) explanation was that inflation was either demand-pull or cost-push.  Cost-push is when something (like oil) gets more expensive and drives up the cost of everything.  Demand-pull is when consumer demand for an item (like housing or gas) is so great that the supply cannot keep up and prices rise. The neo-classical explanation (mostly accepted by main-stream economists but not entirely proven) is that more money added to the economy by the central bank causes all inflation. GunLvr

This is the most accurate answer so far. John Keynes pretty much built the foundation for post-great depression era economics.

Book Description
Where does money come from? Where does it go? Who makes it? The money magicians' secrets are unveiled. We get a close look at their mirrors and smoke machines, their pulleys, cogs, and wheels that create the grand illusion called money. A dry and boring subject? Just wait! You'll be hooked in five minutes. Reads like a detective story — which it really is. But it's all true. This book is about the most blatant scam of all history. It's all here: the cause of wars, boom-bust cycles, inflation, depression, prosperity. Creature from Jekyll Island will change the way you view the world, politics, and money. Your world view will definitely change. You'll never trust a politician again — or a banker.

About the Author
G. Edward Griffin is a writer and documentary film producer with many successful titles to his credit. Listed in Who’s Who in America, he is well known because of his unique talent for researching difficult topics and presenting them in clear terms that all can understand. He has dealt with such diversified subjects as archaeology and ancient earth history, international banking, internal subversion, terrorism, the history of taxation, U.S. foreign policy, the science and politics of cancer therapy, the Supreme Court, and the United Nations. Some of his better known works include The Discovery of Noah's Ark, Moles in High Places, The Open Gates of Troy, No Place to Hide, World Without Cancer, The Life and Words of Robert Welch, The Capitalist Conspiracy, The Grand Design, The Great Prison Break, and The Fearful Master. His most recent book is entitled The Creature From Jekyll Island: A Second Look At The Federal Reserve.

Quoted: I always hear people taoking about inflation. Gas is cheaper then it should be if you account for inflation. My payraise doesnt keep up with inflation. Inflation is higher this year the last. Whatever it may be. But what exactly causes inflation? Why is it my dollar buys 3% less today then it did one year ago? What changed? I understand market changes such in housing, but I dont see how something thats relatively static can change it value every year without fail...... If you assume 3% inflation, then a car that cost $10,000 in 1980 would cost approximately $20,000 in 2000. Why? Aside from changes in process which add to cost, WHY does it cost more now then it did then??

Wealth is the amount of goods that exist in society. It includes gold, oil, lumber, consumer products, and so on.

We use money to convert one form of wealth into another; I produce some product in return for money, then use money to buy other products that I want.

Money represents wealth, but isn't real wealth, in other words.

How much wealth money represents changes. If the amount of wealth increases while the supply of money remains the same, you experience deflation. If the amount of wealth remains the same while the amount of money increases, you experience inflation.

We have generally expereienced inflation, as the supply of money has increased more than the supply of real wealth.

There are different ways of measuring inflation, and none are 100% accurate. For example, a new F-250 might be much better than one made 20 years ago; so the change in sticker price for the F-250 over that period may overstate inflation.

The bottom line though, is that inflation and deflation are related to the ratio of money to real wealth in society.

Quoted: Every explanation is bullshit, except for this one: Somewhere in the consumer-producer cycle, someone decides that they need to charge a little more to get ahead.   This causes his customers to pay more, and they have to cover those costs by increasing their prices as well.

Or else the customers go elsewhere, and the producer has to cut costs to regain his customer base.

Inflation simply means that the amount of money has grown relative to real wealth. Nothing less, nothing more.

Inflation occurs when the supply of money slightly outpaces the increase in demand created by economic growth.

These are all simplistic pieces to the greater answer. Inflation is tied to many things, depending partly upon what the cause of it is, whether it is supply side or consumer side affected etc. Which monetary policy the Fed utilizes in an attempt to keep the economy at an even keel can and does also affect inflation, whether on purpose or by mistake - these affect money supply and other factors of the economy. Inflation rate is primarily measured by a variety of price indexes. An example is the consumer price index (CPI). The fed takes a market basket of various consumer goods and divides the collective price by the previous year's cost and multiplies it by 100. This gives you a price index. Then:

(2005 PI - 2004 PI) / 2004 PI x 100 = rate of inflation for that time span.

If you are really interested, take some economy courses. You'll be suprised at how complex some of the systems really are. Interesting stuff and it opens your eyes to the underpinings of how our monetary and trade systems work.

Quoted: Every explanation is bullshit, except for this one: Somewhere in the consumer-producer cycle, someone decides that they need to charge a little more to get ahead.   This causes his customers to pay more, and they have to cover those costs by increasing their prices as well.   When someone in the cycle tries to get ahead,  the ripple effect propagates around the cycle over and over and over,  as long as nobody is willing to take the hit and freeze prices. I charge more,  you pay more,  you have to get more for your work to make up for it,  your product or service has to go up in price,  and I have to pay more for your product or service.    So I have to raise my prices to compensate for THAT.    And so the cycle runs. CJ

That explanation MAY explain some price increases on a case by case basis, but it does not explain the aggregate phenomenon know as inflation. It really is a money supply issue.

Look at it this way. Money represents value, it is not value itself. If there were only $100 inexistance, then prices would be in fractions of cents. Say that the amount of dollars in existance doubled to $200. If everything else is held constant, then the price of everything would double. That is the mechanism for inflation.

Quoted: It amazes me how money can be created out of thin air.  For example, say you bought 10 registered M16's back in 1986 for $1,000  a pop.  Now they're say $15,000 a pop, you made $140,000 for doing nothing Or buy 1000 shares of a stock at $1 and bam! They go up to $10 a share, same thing. Works going the other way too, buy a stock at $10 now it's worth a $1.00.    Your Beanie Baby collection falls in value just sitting there.  A new car loses 10% of it's value once it's driven off the lot.

Your example is not creating money.  You are creating wealth.  The appreciation in the price of an M16 does not change the money supply.  If you have the M16, it increases your wealth.  f someone wants to give you the money for the M16, they are not printing money.  They are using money that they have saved or would have used for something else.

Inflation is a money supply issue.  You can see what is happening in our macro economy today.  Most of the economic indicators are good, and yet the Fed has been increasing the federal funds interest rate.  The Fed has been worried by a very slight upward pressure in pricing.  So, by raising the federal funds interest rate they are increasing the cost of money and decreasing the money supply.

Quoted: Every explanation is bullshit, except for this one: Somewhere in the consumer-producer cycle, someone decides that they need to charge a little more to get ahead.   This causes his customers to pay more, and they have to cover those costs by increasing their prices as well.   When someone in the cycle tries to get ahead,  the ripple effect propagates around the cycle over and over and over,  as long as nobody is willing to take the hit and freeze prices. I charge more,  you pay more,  you have to get more for your work to make up for it,  your product or service has to go up in price,  and I have to pay more for your product or service.    So I have to raise my prices to compensate for THAT.    And so the cycle runs. CJ

What you describe is the "price wage spiral" and has been widely discredited.

"There is a very simple reason why this isn't correct:  If the money supply does not increase, the "wage and price spiral" runs out of money. If a business raises prices to offset wage increases, less of its production will be sold. If enough is sold that revenue actually increases, as desired, this will have two effects:  (1) people are getting less for their money from this business, which decreases the value going to consumers; and (2) money is drawn from elsewhere in the economy, which means that there is less money left to buy the production of other businesses. Somebody gets the short end of the stick. Somebody has to cut prices."

Quoted: These are all simplistic pieces to the greater answer.

The "greater answer" is the one I already posted; inflation is when the money supply increases relative to real wealth.

Quoted: Quoted: These are all simplistic pieces to the greater answer. The "greater answer" is the one I already posted; inflation is when the money supply increases relative to real wealth.

The question isn't what is inflation. The question is what causes it.

Quoted: Quoted: Quoted: These are all simplistic pieces to the greater answer. The "greater answer" is the one I already posted; inflation is when the money supply increases relative to real wealth. The question isn't what is inflation. The question is what causes it.

Rereading the origional question suggests that the question was more about what inflation is than what causes it.

In any case, inflation is either caused by an expanded money supply or by reduced wealth, or by a combination. We are wealthier in almost all respect than we were in the past, ergo the inflation we are experiencing is due to increased money supply.

Quoted: I always hear people taoking about inflation. Gas is cheaper then it should be if you account for inflation. My payraise doesnt keep up with inflation. Inflation is higher this year the last. Whatever it may be. But what exactly causes inflation? Why is it my dollar buys 3% less today then it did one year ago? What changed? I understand market changes such in housing, but I dont see how something thats relatively static can change it value every year without fail...... If you assume 3% inflation, then a car that cost $10,000 in 1980 would cost approximately $20,000 in 2000. Why? Aside from changes in process which add to cost, WHY does it cost more now then it did then??

You must have missed the key question stated both in the title and Specop_007's post
- At any rate your answer the second time around is better. Mine is more complete, but then again I just wrapped up two semesters of economics so it's pretty fresh in my mind.

Quoted: You must have missed the key question stated both in the title and Specop_007's post

Not at all--looking at the entire post it is clear that what he really needs is to understand what inflation is.

Quoted: - At any rate your answer the second time around is better. Mine is more complete, but then again I just wrapped up two semesters of economics so it's pretty fresh in my mind.

Yours is more detailed but I don't think it is more complete.

Quoted: Quoted: It amazes me how money can be created out of thin air.  For example, say you bought 10 registered M16's back in 1986 for $1,000  a pop.  Now they're say $15,000 a pop, you made $140,000 for doing nothing . Your example is not creating money.  You are creating wealth.  The appreciation in the price of an M16 does not change the money supply.  If you have the M16, it increases your wealth. . . ..

What has happened is that the demand for '16s has increased, while the supply has remained the same as back in '86 or more likely shrank.

It is worth keeping in mind that value is subjective. An M-16's value can't be determined by the material and labor that went into building it. Rather, its value is based upon supply and demand, and the demand is due to a number of factors, mostly subjective.

Inflation is caused by changes in the demand-supply curves.  More demand with supply unchanged, or supply decreased with demand unchanged, and the various gray levels between those two corner cases.

Quoted: Inflation is caused by changes in the demand-supply curves.  More demand with supply unchanged, or supply decreased with demand unchanged, and the various gray levels between those two corner cases.

That's only true if the good being described is money.

Inflation is always and everywhere a monetary phenomenon. -Milton Friedman

Back in the "wage and price control" days of the mid 70's the govt tried to convince everyone that the people were buying too much stuff, and that caused inflation.

The truth is, GOVERNMENTS and ONLY GOVERNMENTS cause inflation.  They "crank up the govt printing press" in effect.  Governments spend more than they have, inflating the money supply.  They bid for goods and services with fiat money.  This starts the price spiral upward.  People spend faster to turn cheapening dollars into goods because they know that the goods will cost more next week, month, or year, their money is losing value every minute.  It behooves you to get rid of the paper money and buy tangible goods.  "Buy now before the price goes up!"

Governments want to blame the citizens for spending the money THEY cheapened.

But never forget, only GOVERNMENTS cause inflation.  They in effect steal some of the value of YOUR money to buy goods and services they don't have the money to buy.

Get a rope!!!

Quoted: Back in the "wage and price control" days of the mid 70's the govt tried to convince everyone that the people were buying too much stuff, and that caused inflation. The truth is, GOVERNMENTS and ONLY GOVERNMENTS cause inflation.  They "crank up the govt printing press" in effect.  Governments spend more than they have, inflating the money supply.  They bid for goods and services with fiat money.  This starts the price spiral upward.  People spend faster to turn cheapening dollars into goods because they know that the goods will cost more next week, month, or year, their money is losing value every minute.  It behooves you to get rid of the paper money and buy tangible goods.  "Buy now before the price goes up!" Governments want to blame the citizens for spending the money THEY cheapened. But never forget, only GOVERNMENTS cause inflation.  They in effect steal some of the value of YOUR money to buy goods and services they don't have the money to buy. Get a rope!!!

That's a bit of a hysterical claim and it represents ignorance as to how the Fed works. It is true that government can and does actively manipulate the money supply in an effort to keep the economy as stable as possible, but those decisions are based on trend indicators to try and stave off severe recessions. The Fed reduces the money supply at times just as it increases it.

Hysterical?  Hardly.

I repeat, GOVERNMENTS cause inflation.

The gov't increases the amount of money in circulation in an attempt to increase spending and boost the economy.  Then the demand goes up for products, so prices increase when supply does not meet demand.  Then the gov't increases the amount of money in circulation again to respond to increased prices and stimulate the economy again.  Then prices rise to meet demand, etc etc etc.  It's a neverending cycle.  

This also affects the value of our dollar globally.  Inflation can be healthy for an economy when kept in check.

So, what exactly causes inflation?

Hot air?

Quoted: Inflation is caused by more money in circulation.

Exactly correct.  Too many dollars, euros, pounds, yen chasing too few goods.

G

According to the Austrian school of economics....

Inflation is defined as follows:
"In popular non-scientific usage, a large increase in the quantity of money in the broader sense which results in a drop in the purchasing power of the monetary unit, falsifies economic calculation and impairs the value of accounting as a means of appraising profits and losses.  Inflation affects the various prices, wage rates, and interst rates at different times and to different degrees.  It thus disarranges consumption, investment, the course of production and the structure of business and industry while increasing the wealth and income of some and decreasing that of others.  Inflation does not increase the available consumable wealth.  It merely rearranges purchasing power by granting some to those who first receive some of the new quantities of money.

This popular definition, a large increase in the quantity of money, is satisfactory for history and politics, but it lacks the precision of a scientific term since the distinction between a small increase and a large increase in quantity of money is indefinite and the differences in their efffects are merely a matter of degree.

A more precise concept for use in theoretical analysis is any increase in the quantitiy of money in the broader sense which is not offset by a corresponding increase in the need for money in the broader sense, so that a fall in the objective exchange-value (purchasing power) of money must ensue.

The currently popular fashion of defining inflation by one of its effects, higher prices, tends to conceal from the public the other effects of an increase in the quantitiy of money whenever the resulting rise in prices is offset by a corresponding drop in prices due to an increase in production.  The use of this definition thus weakens the opposition to further increases in the quantity of money by political fiat or manipulation and permits a still greater distortion of the economic structure before the inevitable readjustment period, popularly known as a recession or depression.

Taken from "Mises Made Easier" by Percy L. Greaves, Jr.

In other words, yes, governments cause inflation!