Inflation 101%, I

Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair. - Sam Ewing

If you asked someone who they thought to be the biggest thief ever, they would be hard-pressed to provide an answer. Robin Hood, the British Museum, or even Lupin might be put forward. While all those might be good answers, none compare to inflation. Despite it being a sour thought, most people, as it happens, know what inflation is, things were less expensive before. If you're the annoying economist type you ask them to elaborate further. That is when our capacity for cognitive dissonance comes into play. A simple, complimentary answer to that question is that the vast majority of life expenses will become more expensive with time.

When you take a look at a visual language, such as Japanese, these concepts become easier to digest. One of the words for inflation in Japanese is 水増し(mizumashi) and its kanji signify water increase. In other words, dilution. To directly mention currency inflation, which is written 通貨膨張 (tsuukabouchou) and whose kanjis mean stretching and swelling of passing goods, might give you a better idea of the concept.

Unlike printing-induced inflation, supply-and-demand inflation is relative to many economic interdependencies. To illustrate, if interest rates are lowered, people will be more inclined to spend and invest. This growing activity will decrease unemployment numbers as companies try to hire more. Wages have to be raised to attract workers who now have larger employment choices. Prices will go up as more people want limited products. Profits will go up, and more money will be invested towards the creation of supply. Conversely, a higher price and a larger quantity of supply than demand will bring the price down. We are all aware of what happened when the PlayStation 5 went out of stock. Independent sellers who managed to buy batches resold them at double the retail price, in other words, made 100% profit on their investment thanks to high demand and low supply.

The banks, on the other hand, can provide returns on savings accounts at a rate below inflation, and then use customers’ money as capital to provide loans at a higher rate, all while pocketing fees and interest. In this scenario, the customer is practically loaning the bank money at a negative rate. Let us illustrate this, you decide to lock in ￡1,000 on a one-year fixed-term savings account with a 3% interest rate. At the end of this year, you will perceive a 3% nominal return, or, in other words, ￡30. The inflation that occurred during the same year was 2.50%; however, this means that the real return of your money will be ￡5, which equals a 0.5% real return. This is not to disparage saving accounts, but their usage should be made clear: for emergency funds, and otherwise planned expenses such as a house advance or current year vacations.

Talk of inflation has come to the spotlight due to the COVID crisis and the enormous quantity of money printed. If we begin at when the pandemic started in January 2020 and stop counting in December 2021, the amount of money printed in the U.S. would equate to around 17 billion dollars, daily. An approximate figure of 13 trillion dollars were printed to deal with the pandemic. If this number does not glue your eyebrows to the ceiling, their national debt of $30 trillion should.

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default. - Alan Greenspan, former U.S. Federal Reserve chairman

The government holds a positive view over printing because, for one, they are the first to receive the money; they are essentially writing themselves a welfare check whose only expenses deducted are the costs of printing. For illustration, a $100 bill costs 14 cents to produce—that's 99.86$ of profit. The richer you are, the faster this new money reaches you. The last to receive, in turn, this new money are those at the bottom percentile, whose costs of living have already risen. They are essentially receiving a tax letter from the government.

Being priced out of coastal and rural areas is attributed to larger costs for larger houses and smaller supply without acknowledging that this trend persists in big cities where having a flat in the city centre is no longer an option for many. While ignoring this fact protects us from depressing realities about life, such as we will need more money, and then even more money. To maintain the same quality of life as we grow older, our income will have to steadily increase, and our cash will have to deliver at least the inflation percentage of the return.

It is no secret that your daily commute to work has become more expensive. Rail fares are increased every January in England, and these rises are based on the RPI (Retail Price Index), which is measured by the ONS (Office for National Statistics). For example, London tube fares, while frozen in the years before 2021 by the current Mayor, Sadiq Khan, have seen consistent increases in the daily cap and travelcard prices.

To illustrate, a loaf of bread fifty years ago cost ￡0.09. Today, a loaf of bread costs ￡1.06 (1,078%). This is an 11x increase, comparatively, wages have increased by 23x. A matter for celebration, not just for bread lovers, since a basket of groceries is much more affordable to our present generation. We have grown richer in many terms, and life is certainly easier, but not all aspects of life. In opposition, house prices have increased by 58x (5,761%). It is very difficult to be happy about affordable groceries when rent alone would take 45% out of your gross income on average for a one-bedroom flat in London. We will discuss housing prices in a later chapter, but this demonstrates that our purchasing power does not grow evenly, in many instances, it decreases.

In recent years, inflation in the U.K. has been measured mainly through the Consumer Price Index (CPI), which is based on the price of a basket of food and essential services consumed by a household. Some of these services are transportation, healthcare, or clothing prices. The CPI was used as the U.K.'s Harmonised Index of Consumer Prices (HICP) as it facilitates comparisons of inflation changes with the European Union.12 Unlike the RPI, it does not take into account housing costs. Another lens of measure is now the lead inflation index in the U.K. as of 2017, which includes owner occupiers’ housing costs and Council Tax for a more accurate action depiction of rates. It is called the Consumer Price Index with Housing (CPIH).

Part II will include historical comparisons from Roman times to today, whether one should job-hop or stay in, and a Greek poem about inflation!

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