The World According to Poppy: What Essentially Causes Inflation?
“I went to the supermarket and bought two bags of groceries—it cost over $200!”
“I filled up my gas tank the other day, and it cost over $75!”
“We recently dined at a steakhouse, and the restaurant charged $175 for a steak!”
“We recently visited a fast food restaurant, and the bill for three came out to $45!”
Does any of this sound familiar?
Many people have been shocked by the increasing cost of living since the Pandemic. In recent years, the price of almost everything has skyrocketed. Shoppers who once avoided discount stores are now frequently seen there, even in expensive cars.
Recent statistics show that approximately 20% of all credit card holders are maxed out. Many only make the minimum payment, which often only covers the interest.
How did we get here?
If history teaches us anything, this is nothing new. The term “debased currency” has its roots in Ancient Rome. As far back as 300 AD, when Diocletian was the Roman Emperor, they were experiencing what we now call “inflation.” Over time, the Roman currency, based on silver, became increasingly devalued (debased). Previous emperors had reduced the amount of silver in the coins, enabling them to issue more currency. By the time Diocletian became Emperor, the Roman currency had sharply lost its value, causing prices to soar and making it increasingly difficult to finance government activities.
Diocletian implemented wage and price controls to curb this problem, which was wreaking havoc on the empire. The government set the price of everything. Merchants who withheld goods from the market, creating what we now know as the “black market,” could be punished by death. However, these controls did not work then and have not worked since. They were, in fact, a significant factor in the collapse of the Roman Empire in 476 AD.
What essentially causes inflation?
Basic economics tells us that “inflation is dollars chasing goods.” This means prices increase when there is more money in circulation than there are goods and services available to purchase. Ideally, the amount of money in the economy should correspond to the value of goods and services produced. However, if the government prints more money than the economy can support with its goods and services, the excess cash creates higher demand. With demand rising but no corresponding increase in supply, prices go up, causing inflation. Wage and price controls don’t work and only serve to fan the flames of inflation.
–by David Lerner
About David Lerner:
Before founding David Lerner Associates, Inc., Mr. Lerner was a history and economics teacher at Bayside High School in Queens, NY. In 1976, he established David Lerner Associates, an investment firm headquartered on Long Island, NY, focusing on educating clients about their investment options. Today, the firm has tens of thousands of clients and branch offices in Westchester, NY; Connecticut; New Jersey; and Florida.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.