Why do the price of items always go up? Is it the growth of wages that cost inflation. Is inflation natural occurring? Wouldn’t it be great if the purchasing power of the value of savings in our bank actually went up instead of down? Won’t it encourage spending responsibly?
Why inflation happens?
Inflation happens when the supply of money exceeds the supply of goods. So lots of money chasing over little goods. Brings us to the next question. What is good for money? Things that can be stored and has use. That is why I think gold, copper or silver are good candidates for being money. For below I will just use the gold standard even though there are other candidates that can be suitable to use as money other than gold.
Why is a gold standard good?
Gold is a limited resource. You have to find them and mine them in order for them to come into existence for use. Therefore when money is pegged to gold. It means they cannot print money as and when they like and when more money goes into circulation inflation comes in. Until a new gold mine and gold is mined out of it. The supply of the money you stays the same.
Next why would deflation come in when the supply of money is constant.
Let us take day to day example. First we come to food.
That is because production goes up. Overtime we have been able to build wheels. Machines. Irrigation for farms. Pesticides. Corp rotation. Gmo. Fertilisers. This has help increase food production. So food supply has went up.
The abc of economics when supply goes up and demands remain the same. Price falls.
Same with housing. Why are houses so much more expensive today then before? Previously we can only build maybe 2 stories now we can build 40 stories and we have machines and prefrabrication. Cement. For that we have been able to build houses faster. Higher. Stronger. With less labour.
The supply of houses have increase because we are able to build houses in sky now to 40 stories even beyond. So shouldn’t price come down as well?
There are other examples like we have been able to produce led lights which are more energy saving then tungsten lights. Air con inverters. Etc.
The natural course if the money supply remains the same and the supply of goods goes up. Deflation comes in and goods becomes cheaper. Is deflation a bad thing? Will people put off buying because their savings grow in value? People need to eat they need to eat now. They cannot put off eating weeks and months into the future. They also need a house to stay. It will make people think about spending in the future where their money can have a better purchasing power than now or if they can’t wait and purchase something now. There will still be people buying now then in the future because we are all living now then in the future. This can be seen in people buying the latest iphone now then waiting for an iphone in the future and infinite future because technology will always be advancing.