What Really Causes Inflation?

Inflation is a topic that comes up a lot these days and for good reason. It seems that many countries are experiencing this economic phenomenon and the USA has been especially hard hit by it in recent years. While many people like to blame just one person for this recent spike in inflation, the truth is that it is caused by many factors. Let’s take a look at these factors and see how they influence inflation.

What is Inflation?

Inflation is when prices and the cost of living go up over time. To put it another way, it could be seen as currency losing value and having less purchasing power. In many cases, inflation is tied to the printing of currency and wages.

Is Inflation Inevitable?

One of the main problems with inflation is how it feeds into itself. Any attempts to combat inflation tend to be temporary at best and simply add more fuel to the fire in the long run. This is one of the reasons why capitalism is marked by boom and bust cycles. This is by design.

Does Inflation Benefit the Rich?

You might be surprised to learn that not everyone hates inflation and the higher cost of living that comes with it. The ultra-rich benefit from inflation and the boom-bust cycles of capitalism. Wealth is finite and these factors help the rich decision-makers who have great control over the economy to accumulate as much of the world’s wealth as possible. In that sense, inflation is not a problem but an opportunity for upward wealth redistribution. The finite nature of wealth means that the rich are at their richest when everyone else is at their poorest.

Factors that Cause Inflation

Now that we’ve gone over some of the basic facts of inflation, let’s get into what causes it. Keep in mind that inflation is extremely complicated so it’s best to try and understand it in simple terms and ideas if you’re not an actual economist.

  1. Higher Demand for Goods

When there is a greater demand for goods on the consumer side, prices will rise on the supply side. Higher demand can be caused by a variety of factors including population growth, increased consumer spending, and businesses expanding into new markets. In other words, the more consumers spend on goods, the more they will be forced to spend on goods because of inflation.

  1. Supply Side Disruptions

Anything that lowers supply about demand will lead to inflation. For example, if the cost of the rare earth metals used in smartphones were to increase, the price of smartphones would increase. Any disruption can cause this from transportation issues, to trade embargos and international sanctions. Natural disasters and droughts that damage crops and production facilities can also cause disruptions that lead to inflation.

The most well-known modern disruption was the COVID-19 pandemic. It caused disruptions across many industries and we’re still feeling the effects of it on inflation to this day.

  1. Inflation Psychology

Inflation psychology is when businesses raise prices to offset the cost of production in anticipation of inflation. It’s also when workers demand higher wages out of the fear of inflation as well. The idea of inflation leads to people making decisions that cause inflation. Sometimes this is also known as “inflation expectations.”

  1. Increased Wages

The more people earn, the more they spend, and the more they spend, the more demand there is. This of course leads to higher prices. It’s almost paradoxical. Businesses want people to spend more but also want to pay their workers less to maximize profits. However, the less they pay their workers, the less they spend. Either way, the workers get the short end of the stick since higher wages lead to more inflation and lower wages lead to poverty.

Speaking of paying workers less, some businesses like to gaslight workers into believing that rising wages are the main driving force behind inflation to justify paying them less. The truth is that inflation is much more complicated than that.

  1. Printing Currency

The value of currency is a very complicated thing. Even so, it’s easy to understand that the more currency is printed and in circulation, the less value it has. The ancient Mongolians collapsed their economy at the height of their empire by printing endless amounts of currency to fund their wars. Similar scenarios have played out in many countries over the centuries as well.

As a currency becomes devalued, its purchasing power drops as well. This causes inflation. For example, if a pack of hot dogs at the grocery store costs $5 USD and USD were to lose half its value, then you’d have to pay $10 for the same product.

Inflation is Not Solvable

Inflation is not fixable because it is a built-in quality of our economic systems. No president, politician, or business owner can make it go away and anyone who claims to be able to fix inflation is a liar. Also, the ones that have the greatest control over our economy, the ultra-rich business owners, have very little incentive to try and mitigate inflation since it benefits them in the long run. As long as our current economic systems persist, inflation is here to stay.

Will Inflation Collapse the Economy?

Economies are notoriously difficult to predict. However, in the long term, most modern economies tend towards collapse or near collapse as various factors come into play over time. A good example of this was the Great Depression in the USA when wealth inequality between the rich and everyone else became so great that the president, Franklin D. Roosevelt, had to tax the rich at up to 75% of their incomes. Without the New Deal, there would likely have been a revolution or total economic collapse. Possibly both.

These days it seems reasonable to believe that inflation in the USA will continue until a near collapse state is reached. What happens at that point is anyone’s guess. Will there be another New Deal? Will there be a revolution? Or will it just be total anarchy? It’s hard to say, but since the economy is a power structure, it will always exist in one form or another as long as humans maintain a hierarchical society.