Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Facing the Fact of Increasing Prices: Inflation


In This Chapter


Understanding how economists calculate inflation


Seeing why printing more money causes inflation


Recognising that inflation can be a curse and a blessing


Experiencing the extreme poles of hyperinflation and deflation
If you ask your grandparents how much things used to cost when they were young, most likely you hear them drone on endlessly (sorry, reminisce movingly) about how cheap things used to be in their day. If you’re a grandparent, try the opposite: ask your grandchildren how much rent they pay – you’re likely to be equally shocked!

Yet quite why the prices of things tend to rise over time isn’t at all obvious. Why can’t prices fall or even stay roughly constant? In modern times, what about prices causes them to go up over time in almost all countries? These questions are just some of the ones that macroeconomists attempt to answer.

The increase in the average level of prices in an economy is called


inflation. It’s one of those topics in macroeconomics that affects everybody and about which almost everyone has an opinion. Inflation is also a subject that confuses a lot of people, not least because of a big difference in the way economists think about the issues compared to the way laypeople often do.

In this chapter you discover how inflation is calculated, what influences and causes it and the different inflation measures used. You also find out why high inflation is bad but, perhaps surprisingly, why some inflation may be good. In addition, we let you in on how bad government policies can lead to

extremely high inflation (called hyperinflation) and we talk briefly about the unusual problem of prolonged price falls (known as deflation).