Simple explanation of inflation.

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Ok. You are going to hear a lot about inflation. Therefore, I will try to explain what little I know. Inflation is a supply and demand function.

Let's say that you are accustomed to making $1000 dollars for selling 100 pencils. Then your supply is interrupted. Where you once had 100 pencils to sell, now you only have 50. Before, you sold your pencils at $10 each. Now that you only have 50 pencils to sell you sell them at $20 each to continue to make the same money.

That is inflation , when there is more people to buy(demand) then product to sell(supply). An increase in price is not automatically inflation, though Obama liberal media supporters would like you to think so.

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Actually, inflation is when the value of money drops, say, by printing too much without enough progress to back it up.

If your supply halved, you would have a supply problem, not inflation, driving up the price.

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erathoniel is correct here. Inflation is caused by the value of whatever the standard monetary unit is (in the US it's dollars), interest rates (primarily the one the central bank sets, if a central bank exists), and to a lesser extent the tax rate.

In the US because of the housing market crumbling the Federal Reserve (a private bank, NOT a government entity) lowered interest rates and pumps gobs of money into the system. This in turn has caused the value of the US dollar to fall rapidly (ex. 1 Euro used to be worth less than one dollar, but today 1 dollar = about 1.5 Euros). As a result of the dollar falling prices have started going up because it takes more dollars to get the same value for goods and services. Add to that the fact that oil is priced in dollars which causes oil to skyrocket in price. And with oil up it costs more to transport products to market which causes further inflation. We are in a domino game right now thanks to the Fed killing the value of our dollar. And it's going to get a good bit worse before it starts to get better.

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An increase in price is not automatically inflation, though Obama liberal media supporters would like you to think so

? If prices on average increase, you've got inflation. That is, the purchasing power of $1 after the price increase is lower than before. Of course measuring the actual rate of inflation is a much tougher prospect. Typically what is done is to take a 'basket' of goods for the average individual and look at how the prices on those goods change over time. You also have to factor in things such as increasing quality (e.g. a computer today is much better than one 3 years ago. Say it costs 10% more, how do you deal with that - is the inflation on the computer 10%, or do you use the price today of the now 3-year older computer, or something in between), and have problems with inflation then not always being an ideal measure for basing other policy decisions on, since you can have different rates of inflation affecting different groups of society, with various welfare consequences. So for example at the moment you've got spiralling oil prices leading to higher electricity+gas costs. You also have higher food prices. On the other hand you have decreasing prices in other areas, in particular some luxury good items. The average rate of inflation could end up being 5%, but for poor people inflation could be 15% and rich people just 1%, due to their different spending patterns.

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