"A dollar ain't what it used to be." That may sound like some old person's complaint, a bit like how they used to have to walk to school uphill both ways through the snow. But it happens to be true, and it's true because of inflation. Over time, inflation causes money to lose some of its value; prices rise, meaning you can't buy as much with a buck today as your great-grandpa could back in the good old days.
There are several ways to measure inflation—but the most common are the Consumer Price Index and the Producer Index. The CPI is the most commonly reported—it measures the changing prices of about 400 goods and services that people commonly consume. If this “basket” of goods and services goes up in price, we have inflation.
Simple enough. But every increase in prices is not cause for alarm. In fact, a certain amount of inflation is actually a good sign. It means that most people are employed, have money in their pockets, and are willing to spend it. Most economists think that 2.5-3% inflation is acceptable. When it rises above this level, they begin to worry.
Economists also break inflation down into different types. If production costs push prices up, they call it cost-push inflation. When demand for products pulls prices up, they call it demand-pull inflation. Sometimes, rising production costs and increased demand combine to force prices upward at the same time. When this occurs, we end up with the (rather oddly named) push-pull inflation.
Why It Matters Today
Been to the movies lately? What did your ticket cost you?
We love the movies, but lately it sure seems to cost an arm and a leg to spend the evening at our local megaplex. In 2010, the average price for a ticket to the cinema nationwide was $7.95. Back in 1990, it was only $4.23. And way back in 1910, it was just 7 cents.
So what happened? Are movies today more than 100 times better than they were 100 years ago? The special effects certainly are... but that's not really the point here. The point is that a century of mild inflation has eroded the dollar's value over time.
Except for a few very short periods, the United States has rarely suffered from catastrophic inflation. Boosting the cost of a movie ticket from 7 cents to 7 bucks over the course of 100 years isn't so bad. But what if inflation got out of control? What if it cost 70 dollars to go to a movie next year? Would you still go?
Sometimes, a Song Says it Better: Hard Knock Life, by Jay Z
Orphan Annie might have done it first but Jay Z arguably does it better. He stays ahead of escalating prices by putting his “money on the longshots”. Probably not the best anti-inflation strategy but a strategy nonetheless.