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What Causes Inflation?

by A Blinkin on December 4, 2012

Sometimes I wish that inflation were a tangible thing so that people would pay more attention to it.

Could you imagine the outrage caused by someone stealing money from you every day? I think we would all do whatever it took to prevent this thievery from happening.

If we were to dress up this financial phenomena, I would imagine something extremely ugly that looked like this…

 

Since inflation is obviously intangible, it’s much more dangerous than a balding Chairman.

What Causes Inflation?

I’ve covered the risk of inflation many times so I’ll spare you the recap. Instead, I want to focus on the cause of inflation.

Most people confuse the cause with the effect.

For example, I was having a conversation today with a man that I would classify as intelligent. Like most of my conversations, we spoke about Presidents, Governments and Inflation. You mean, you don’t have these conversations daily?

I recall him saying that “higher prices caused inflation.”

A Common Misunderstanding

Most of us consider inflation to be a general rise in prices. While this is a valid observation, the rise in prices is actually the effect. Higher prices don’t cause inflation.

An increase in the money supply causes inflation.

Inflation, in my favorite definition, is too many dollars chasing too few goods.

Today’s Inflation

Who knows where inflation is headed? The Federal Reserve is confident that we won’t experience crippling inflation. I, however, am not so sure. If inflation is caused by an increase in the money supply AND the Federal Reserve is printing money like it’s going out of style, it seems to me that we’ll experience (beyond normal) inflation.

It’s impossible to know when this will occur (and what prices will inflate as a result), but when it does…dollars are the last thing I want to be holding.

picture credit: thefreedomnation.com

Written by A Blinkin

A Blinkin

Hunter Kern, aka A. Blinkin, is the blogger behind Funancials. His experience in banking, lending, payments and investments has earned him the title of “Personal Finance Guru.” In addition to helping people with their finances, Hunter enjoys crunchy tacos, spending time with his wife and puppy, and writing in third person.

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