Inflation: everybody panic, we’re all gonna die!!!


I just finished watching this, uhm, interesting video and then followed it up with this gem.  Both tell of impending (you said within the next year, back in 2009, Glenn Beck) economic doom due to out-of-control, destructive inflation.  Now, lord knows I’d tell you that I’m sufficiently terrified of inflation (also of China, also of Communists, also of clowns)…except that I’m not (Disclaimer: I am actually a little afraid of clowns).   Don’t get me wrong, inflation is important, but it isn’t going to destroy our country any time soon.  Still, judging by the number of people that “liked” both of those YouTube videos, I would venture a guess that many folks may not really fully understand inflation and its true effects on the economy.  So, I want to set the record straight and explain why Glenn Beck isn’t thinking clearly (as if you really needed me to do that).  

Most people don’t like inflation because they think it decreases their individual purchasing power.  The logic goes something like this: the prices of things I want have risen because of inflation and now I can’t get as much stuff as I could before, right?  Well, not really, no.  The definition of inflation is a general rise in price of all goods and services in the economy–and that includes wages, meaning that as the price of the things we want increases, so does our ability to get them through an increase in our earnings.  In this sense, though the purchasing power of each dollar decreases when inflation rises, our individual purchasing power remains intact.

Now, if prices have increased, but your wages haven’t, you can probably blame other economic factors, like the general increase in inequality of earnings between the super rich and everyone else, rather than inflation.  Why? Because all inflation really measures is how many green pieces of paper with pictures of presidents on them are circulating throughout the economy.  In and of itself, the overall number of dollar bills doesn’t actually matter.  Dollars are literally just paper; they only have value because of what they represent, stuff. And how much stuff we have and make isn’t determined by green pieces of paper, but by other stuff, like the economy’s capital stock and the quantity and productivity of its labor force.  When we go about our day-to-day jobs, we are making stuff; we therefore expect to get stuff in return.  Money is merely a medium, a unit of exchange, nothing more. Make sense?

For all this fear mongering of hyperinflation (which actually wouldn’t be nice), the inflation rate in FY2011 has so far ranged between 1.6 and 3.5 percent, well within normal levels (the Fed shoots for about 2%).  With these levels we can expect typical, minor inflation costs like shoe-leather and menu costs, but I don’t plan on panicking anytime soon…unless I get attacked by a clown.