Its hard to get away from, seems to be causing lots of problems and everyone from Bord Gais to Mr Putin get blamed for it – but what exactly is inflation and where does it come from ?
Inflation is too much money chasing too few goods. Its that simple.
Think about a small country – the total amount of goods produced is 100 units and the total amount of money in that country is €100. So on average we would expect that each good costs €1. Nice and easy. But say overnight, before the factories opened – a Central Bank printed an extra €20 and put it evenly into eveyones Bank account. What would happen ? Well we would expect each good to now cost €1.20 as there is €120 in the economy and still only 100 goods. What we have here is 20% inflation.
This is what has happened in the global economy. The Central Banks have printed (just made it up) massive amounts of extra money and dispersed it into the economy (inflation in the us). They also did it at a time when factories were closed – so supply of the 100 units was actually falling ! Inflation is just the recording of the result of this extra money. If you take the 100 and adjust for the amount of goods in the world – could be 100bn units – then you get the picture.
What about the war – how does that impact inflation ?
So why do I hear about Putin and bad companies casuing hyper-inflation ? What about people putting up their prices ? The Putin inflation is just a politcal convenience. Energy prices were already sky rocketing before he invaded – it did spike them briefly but its defintely not the source of the problem. We had a huge fire and Putin was just one more log added – burns a bit brighter but it did not start the fire.
What caused this was Governments/Central Banks always wanting to be the good guy. “Free money” – that is what has been handed out since Covid, supports to businesses that are not open, supports to people not producing anything – its all extra money in with nothing extra produced – its has to cause rate inflation.
How do you solve it ? Answer = painfully. If we take energy prices, the best way to drive the price of it down would be to buy less of it. If the demand for oil and gas declined it would reduce the price too. This is how it usually gets fixed – the price of a good rises too high for most people to afford it – then nobody buys and in order for the producer to sell it they must drop the price. If everybody keeps paying the high price why would the producer stop increasing his price ? We have decided to try and solve this energy problem in Europe by literally handing households “free” money to pay for their bills. So as the price goes up – we ensure that we boost demand by handing out free money to make sure eveyone can use as much as they need. This will just keep pushing the price up !!! Its Madness. The Inflation data shows this – see the inflation calculator (CPI inflation rate)
If you look at the recent budget – the amount of money in the economy was increased by the Government by €11bn. Thats not million ! So we put €11bn extra money into peoples accounts (tax cuts, social welfare increases, public sector pay), nothing extra was produced – what do we think will happen to the price ? Only one thing can happen and the biggest problem is that we will now get trapped in a cycle. Prices keep going up – people want short term solutions – and the free money is produced. 2023 will see more and more government “fixes” for higher prices, the problem is that all of them will cause more inflation as they will always solve every polictical problem with the one4all solution – Free money.
Whats next ?
Until one day the Free Money is … well … not free after all. What inflation is…. is very,very expensive. Contact us now to learn more