It’s what makes prices go up, your raise worthless, and the money in your bank account degrade in value: inflation. Ugh.
Unexpected inflation is one of the worst kinds of inflation, since nobody was anticipating it. Nobody, as in: economists, regulators...the people we pay to know what’s up with the economy and inflation and stuff.
When inflation goes up, prices go up. Paychecks follow, albeit at a slower pace. That’s why a raise can be worth nothing: if prices went up and you have the same buying power as a few years ago, then your real income didn’t rise, even if your nominal income did. And if your savings account is only paying you 1% interest, and inflation is 2.5%, then your money is eroding 1.5% in real value every year. With unexpected inflation, your buying power will erode at an even greater rate. As a borrower, inflation is good though, since the real amount you have to pay back is shrinking as prices and incomes rise.
Unexpected inflation happens when economists’ models are wrong, which is...well, we don’t know how often. That’s why there’s so many major schools of economic thought. Even if an economic model might appear to be true to reality...it might not be. We only know when things go wrong that our model is for sure wrong, like when there’s unexpected inflation.
Most modern economies function on Keynesian principles, which means the central bank intervenes when the economy is down, and the policy is to promote spending to keep the economy’s energy up. Yet part of Keynesianism stated that inflation wouldn’t happen with GDP growth was slow...which makes sense, right? Why would prices rise when growth is slow? Usually, if growth is slow, things go on sale, because firms try to attract buyers.
In the 1970s, that part of Keynesianism was shown to be false, as unexpected inflation occurred during a period of slow economic growth, puzzling economists. Hrrmmmmfff.
Related or Semi-related Video
Finance: What is Disinflation?4 Views
finance a la shmoop what is disinflation disinflation often confused with dat
inflation refers to the decline in inflation rates over time in 1973
America was fully juiced with Warbucks from Vietnam inflation hovered around [soldiers firing weapons]
the mid going on high single digits and then higher from there like 7% or more
depending on where you look him and Jimmy Carter stepped in on this guy and [Carter walks into office]
raised the federal rates the Fed rates their massively stamping out the wild
bull economy and putting the brakes on inflation but it didn't happen until
after Carter was actually out of office and Reagan took over inflation [Reagan replaces Carter in office]
eventually had rocketed all the way up to about 14 ish percent on an annualized
basis looking at the monthlies in the 1980-81 period right here
well the crux of dis inflation is that inflation is still positive it's just
becoming well less positive and or like you know how you feel not long after you
say I do and the honeymoon is over and you have to take out the garbage so
under Carter the US inflation rates were attacked in a variety of ways the [Carter in a boxing ring]
biggest of which was to make the cost of renting capital very expensive which
cooled the economy but it took a long time like note how slowly inflation
rates came down and well really it was decades before things fully stabilized
you can see how things slowly disinflation the raging levels that
peaked at post-vietnam era 1314 percent then slid all the way down to a 1 to 3
percent way down there where it's hovered for a
while so that's disinflation still inflation but just less of it deflation [Disinflation deflating]
is when inflation turns negative like prices are actually declining and yes
we've had periods of deflation before albeit very short ones like in the post
mortgage crisis Mallove's in 2009 right here yes yes it's rare but it happens
got it okay class dismissed
Up Next
What is inflation, and if we poke it with a pin, will it pop?