Why Is Inflation Picking Up So Quickly?
The key is to understand what inflation is. The definition of inflation that economists use is “too much money chasing too few goods.” If you break this down, you will notice two parts. There is the quantity money part and the goods part. The word “goods” means anything that you purchase with money, which could be things, services, expertise etc. Notice that there is a relationship between the money and the goods. This relationship is governed by supply and demand, but an easy way to think of it is that there has to be a balance between the two things in order to have the value of goods remain stable.
How can too much money come to pass? The question that comes from this is: How does money get created? Today’s money is called fiat money. Fiat means “by decree” or “by law”. When you see the words used “by law”; this can be interpreted as “by force”. Since laws are enforced by the police or the military which literally means they will cause you harm if the laws are not followed. Think of the mafia but legal. This means that we don’t have any choice with respect to the money we are using if we want to follow the law. By definition, other forms of money cannot be used for transactions or purchase of goods. Try using gold or silver coins or cryptocurrencies to pay taxes in Canada. Only Canadian dollars can be used. The other key term to remember is that today’s money is a debt unit.
