Inflation - what does it mean?

Question

Could someone give a *simple* explanation for a dimwit like me of what inflation means in economic terms?

Answer 1

Inflation- the value of money is lowered (unintentionally)

-the cost for a product is raised due to the dropping of the value of money.

Think about it this way. If you had the first and only Corvette ever built....it would be worth a lot of money. But then one day 100,000 Corvettes exactly the same as yours are made. Now your corvette loses value because your not the only one driving a Corvette. Now your car loses value and the cost for a corvette is increased because EVERYONE must have one!

Answer 2

Inflation means that money will buy less than it used to.

When I bought my first house, it cost £12,000. Now the same house would probably cost £120,000 or more. That's an example of house price inflation.

We're currently seeing inflation in the price of oil. What that means is that for every £1 or $1 or whatever, you get less oil for your money. The same goes for food, which is also undergoing price inflation.

Of course this means that people find it harder to survive, so they demand higher wages. If they get them, this is called wage inflation.

So in inflationary times, prices keep rising and wages keep rising to keep in step ("cost of living" increases). Because the wages feed into the price of goods and services, the prices have to rise further. This causes an "inflationary spiral", which is bad news.

It's bad news because it unbalances the economy. Some sectors come out better, e.g. strong trades unions, and some come out worse, e.g. pensioners. Typically public sector workers suffer, as the government can control their wages directly whereas it's more difficult to control what companies pay their employees -- any laws on pay restraint can be bypassed by awarding notional promotions, regradings, etc.

The best way to look at inflation is that money loses its value, in terms of what it can buy.

For a stable economy, the value of money should stay more or less constant, otherwise it can't be used as a store of value, which is one of its main properties.

Answer 3

Prices go up, wages dont, people lose jobs, people lose house, unemployment, depression

Answer 4

I'm not sure the corvette analogy works very well...

Inflation, put simply, is a rise in the general level of prices over time. For example, the price of food, oil, and raw materials have been going up over the last year. However, when the Federal Reserve (central bank of the US) or other central banks talk about inflation they are generally referring to changes in the Consumer Price Index (CPI) or Core CPI which is a basket of goods the average household consumes (for example: heating oil, eggs, bacon, gasoline, etc.) Now it is possible for the prices of some goods to increase while others decline- offsetting each other in the CPI measurement.

Inflation (defined as increases in the price of the standard basket of goods) is generally believed to be caused by a number of factors depending on what economic school of thought you belong to, but that involves a lengthier answer, If you are interested wikipedia gives a very goods overview in the inflation article.