I appreciate the reply, but with respect it just explains what happens, not why 25c doesn’t have the same value now as it did 60 years ago, or 100 years ago.
The common traditional view is what’s callled the “quantity theory of money”. It basically says that the amount of money in the system relative to the amount of stuff people are trying to buy with that money is what determines the value of the money. When governments add more money to the system faster than more stuff is being bought, the value of each unit of money goes down because you’ve got more money per stuff overall.
This quantity theory is not universally accepted. Central banks nowadays tend not to try to add specific amounts of money to the system, they just tell other entities in the economy (like the government or other banks) what it’ll cost them to take a loan from the central bank (which effectively makes new money and adds it to the system). If you borrow £1,000 from the bank at a 5% interest rate, the bank does not need to get that £1,000 from anywhere, it can just say “we’ll back this up as money that you have when you try to spend it, and people trust our backing so they’ll take the money”. This means that there’s a new £1,000 in the system that can now be spent when there wasn’t before. As you pay the loan back that money is effectively deleted (barring stuff like the value of the interest or defaulting on the loan).
Central banks nowadays basically pick an inflation rate that they want to aim for and adjust interest rates up and down until the inflation rate gets close to that target. If interest rates are high, taking a loan is a worse deal and fewer people do it, so less new money is added to the system. If they’re low, the opposite. This gives the central bank a fairly powerful tool to affect the inflation rate.
The reason central banks want inflation is to discourage the hoarding of cash. If your money will always be worth a little bit less tomorrow, the sensible thing to do is buy things that you want to buy sooner rather than later. If there is deflation, where the money becomes worth more instead, suddenly the sensible thing to do is hold off from buying things for as long as possible. All of a sudden everyone that could be buying things is doing their best not to and there’s way less economic activity going on. However, you also don’t want too much inflation because ordinary people rapidly become unable to afford things and eventually everyone loses faith in your currency. If that trust is lost, the whole point of the currency is lost and it becomes worthless. See the Zimbabwean dollar for a notorious example of this happening.
Sometimes countries also want their currency to be worth more or less for the purposes of getting better deals in international trade. If your currency becomes worth less compared to other currencies, it becomes a good deal for other countries to buy things from you. It also becomes a worse deal for you to buy things from other countries for the same reason, so you need to figure out what you’re buying and selling where.
Other stuff can throw a spanner in the works, of course. During covid, for example, we were suddenly producing a lot less of a lot of stuff that we still wanted the same amounts of. Everyone initially had about as much money as before but there was less stuff to spend it on, so sellers were suddenly able to charge a lot more for each unit of stuff because they might as well just sell to the buyers that will pay the higher price if they only have a limited stock of stuff. This is basically the quantity theory coming back again in a sense, but unintentionally. The interest rate adjustments sometimes cannot manage to cover these effects; see, for example, Russia’s current sky-high interest rates as they try to compensate for the effects of the enormous amount of military spending they’re doing.
The simplest factor is that more money gets printed. One of the foundational assumptions of market systems is that the more of something there is the less valuable it is (generally speaking). So inflation is just your dollar slowly getting less valuable over time
Ultimately no one agrees 100% on the answer. But we can say there are two major reasons.
Demand is significantly higher than supply, thus raising prices. It basically costs more to buy the same thing because it’s scarce.
Or prices go up because raw materials cost more. Tariffs are an artificial way to add costs of production. But lack of the basic materials causes prices to go up thus lowering purchasing power.
To a lesser extent, public sentiment can drive inflation. And printing money as well.
All of this is exacerbated by the dollar not being tied to gold anymore.
In the 1960s, you could buy a candy bar for 25c. Today, the same candy bar is like $5.
That $5 has the same buying power as 25c in the 60s. It means the money is worth less over time.
I appreciate the reply, but with respect it just explains what happens, not why 25c doesn’t have the same value now as it did 60 years ago, or 100 years ago.
The common traditional view is what’s callled the “quantity theory of money”. It basically says that the amount of money in the system relative to the amount of stuff people are trying to buy with that money is what determines the value of the money. When governments add more money to the system faster than more stuff is being bought, the value of each unit of money goes down because you’ve got more money per stuff overall.
This quantity theory is not universally accepted. Central banks nowadays tend not to try to add specific amounts of money to the system, they just tell other entities in the economy (like the government or other banks) what it’ll cost them to take a loan from the central bank (which effectively makes new money and adds it to the system). If you borrow £1,000 from the bank at a 5% interest rate, the bank does not need to get that £1,000 from anywhere, it can just say “we’ll back this up as money that you have when you try to spend it, and people trust our backing so they’ll take the money”. This means that there’s a new £1,000 in the system that can now be spent when there wasn’t before. As you pay the loan back that money is effectively deleted (barring stuff like the value of the interest or defaulting on the loan).
Central banks nowadays basically pick an inflation rate that they want to aim for and adjust interest rates up and down until the inflation rate gets close to that target. If interest rates are high, taking a loan is a worse deal and fewer people do it, so less new money is added to the system. If they’re low, the opposite. This gives the central bank a fairly powerful tool to affect the inflation rate.
The reason central banks want inflation is to discourage the hoarding of cash. If your money will always be worth a little bit less tomorrow, the sensible thing to do is buy things that you want to buy sooner rather than later. If there is deflation, where the money becomes worth more instead, suddenly the sensible thing to do is hold off from buying things for as long as possible. All of a sudden everyone that could be buying things is doing their best not to and there’s way less economic activity going on. However, you also don’t want too much inflation because ordinary people rapidly become unable to afford things and eventually everyone loses faith in your currency. If that trust is lost, the whole point of the currency is lost and it becomes worthless. See the Zimbabwean dollar for a notorious example of this happening.
Sometimes countries also want their currency to be worth more or less for the purposes of getting better deals in international trade. If your currency becomes worth less compared to other currencies, it becomes a good deal for other countries to buy things from you. It also becomes a worse deal for you to buy things from other countries for the same reason, so you need to figure out what you’re buying and selling where.
Other stuff can throw a spanner in the works, of course. During covid, for example, we were suddenly producing a lot less of a lot of stuff that we still wanted the same amounts of. Everyone initially had about as much money as before but there was less stuff to spend it on, so sellers were suddenly able to charge a lot more for each unit of stuff because they might as well just sell to the buyers that will pay the higher price if they only have a limited stock of stuff. This is basically the quantity theory coming back again in a sense, but unintentionally. The interest rate adjustments sometimes cannot manage to cover these effects; see, for example, Russia’s current sky-high interest rates as they try to compensate for the effects of the enormous amount of military spending they’re doing.
You didn’t ask why. With all due respect. You said you didn’t get it. Maybe next time be more descriptive of what you’re looking for.
The joys of the internet. My “respect” comment was genuine.
But why
The simplest factor is that more money gets printed. One of the foundational assumptions of market systems is that the more of something there is the less valuable it is (generally speaking). So inflation is just your dollar slowly getting less valuable over time
Ultimately no one agrees 100% on the answer. But we can say there are two major reasons.
Demand is significantly higher than supply, thus raising prices. It basically costs more to buy the same thing because it’s scarce.
Or prices go up because raw materials cost more. Tariffs are an artificial way to add costs of production. But lack of the basic materials causes prices to go up thus lowering purchasing power.
To a lesser extent, public sentiment can drive inflation. And printing money as well.
All of this is exacerbated by the dollar not being tied to gold anymore.