Inflation: What Is That?
Let us simplify it for you.
The word “inflation” can mean an increase in the price you pay for goods.
If you are used to paying IDR 5,000 for a plate of nasi goreng across Jakarta then, suddenly, because of inflation, your regular Warteg (Warung Tegal starts charging IDR 6,000.00 for the same food. Now this means your money has decreased its value while prices for the same goods have increased. That is the “effect” of inflation.
The American Heritage Dictionary of the English Language, Fourth Edition, Copyright 2000 goes on to say that “inflation” is caused by an increase in available currency and credit beyond the proportion of available good and services.
So whenever you see prices going up, that’s the “effect” of inflation. What is being inflated is definitely the price, hence, “price inflation”.
We hope we didn’t lose you.
IDR 5,000.00 IDR 6,000.00
Now, the actual debate on the very definition of inflation continues, but there are two types that basically ensure your money isn’t enough:
- Price Inflation. As discussed above, that’s when it takes more money to buy the same item.
- Monetary Inflation. Whenever the government prints more “physical money,” devaluing the existing circulation of money, that’s monetary inflation. Of course, governments have more sophisticated ways of inserting that additional money.
Tom Rose made a very interesting example: Let me give a simple example: Picture me with a toy balloon in my hand. I put the balloon up to my lips and blow air into it. Result: the balloon expands. I have inflated the balloon! Assume that the air I expel from my lungs into the balloon is money, and assume that the circumference of the balloon represents the general price level. With each huff and puff more air (money) is injected into the balloon (the economy), and the result is that the circumference (price level) rises. This is what monetary inflation (injected air into the balloon) and subsequently rising prices (the growing circumference of the balloon) is all about.
And you do know what happens next when that balloon pops.
The next questions are:
- what is the inflation rate of your country?
- what are the steps that your government is doing about it?
- more importantly, what are the things you can do to stop inflation from ruining your newfound wealth?
Tune in next week.