Inflation and Money Supply Explained
Inflation makes keeping up with the cost of living difficult. The current economic climate is forcing many people to deplete their savings and even rack up scores of credit card debt to stay afloat. This isn’t just a monetary problem, and what’s worse, it can quickly turn into a snowball. And this can open the door to larger problems down the line.
In today’s article, let’s take a deeper look at inflation, its key drivers, and the different types of money.
What is inflation?
At its basic level, inflation means a general increase in prices across an economy, this is well-known to nearly all of us. After all, who hasn’t reminisced about how little lunch and coffee used to cost or how cheap rents used to be? And is there anyone who hasn’t noticed prices on everything from cookies to movie tickets going up?
It’s all about inflation. However, we as consumers hate inflation since it means we can’t buy as much coffee, instead having to rack up scores of debt on our cards to stay afloat. Many economists believe that inflation can be healthy for a nation’s economy, as long as it doesn’t exceed a 3% milestone.
With the current inflation rate of 8.3% in the US, consumers are witnessing their purchasing power fall in real time. That’s not what makes us happy, right? Businesses make less money on their products or services, so they have to cut costs which often results in laying off or terminating employees. But what causes inflation? Can we prevent it?
What makes prices creep upward?
Defining inflation is easier than pointing to what exactly causes it. However, inflation isn’t a mysterious economic force. It’s a response to a few key factors in the economy. So what makes the costs of products and services go up?
There are two key economic factors that cause inflation:
- Demand-pull
- Cost-push
Some experts cite the third cause of inflation as an increase in the money supply. Nevertheless, the Federal Reserve cites that the relationship between the money supply and the rate of inflation has changed and decreased, so it’s not a separate cause on its own.
Three types of inflation
Demand-pull inflation occurs when the aggregate demand gets higher than the aggregate supply. It means that producers cannot provide enough to meet the demand and may not have the time and resources to improve their manufacturing to the point required to boost supply. Sellers then raise their prices. If a vast majority of sellers do this, inflation kicks in.
There are several reasons why demand-pull inflation occurs — a growing economy and discretionary fiscal policy. But these two circumstances have the same cause — people get extra money in their pockets that, in turn, increases demand and prompts inflation.
Сost-push inflation arises when the aggregate demand is the same but the aggregate supply becomes lower which causes prices to rise. There are several reasons for this type of inflation, such as global supply chain disruptions, taxation, government regulations, rising wages, etc.
Built-in inflation or a wage-price spiral takes place when workers demand higher wages to keep up with rising prices. This, in turn, makes businesses increase their prices to offset their rising wage costs, leading to a vicious cycle of price and wage increases.
However, inflation opens up new opportunities for investors. For example, users can use all the capabilities of DeFi to hedge against the value of their money eroding. With sEURO and The Standard, users can take a zero-interest loan, invest the money, and leverage inflation to devalue the debt. As a result, you can get more while paying less. DeFi is truly amazing!
Learn more about borrowing from your assets and leveraging inflation on our YouTube channel.
Money supply definition and its types
The money supply is made up of all the money circulating or existing in a country’s economy. As of May 2022, the Federal Reserve reported that the money supply hit a new milestone — $20.62 trillion. According to monetarists, such an increase in the supply of money leads to inflation. However, these relationships have become unstable.
An increase in the money supply leads to lower interest rates that in turn, generate more investment and consumers get more money into their hands, thereby stimulating spending. In short, the money supply has a great impact on macroeconomic performance and business life cycles.
The definitions of money supply and money supply curve are closely related. The supply curve shows the relationship between the market interest rate and the amount of money supplied.
The money supply includes every type of money existing and circulating in a country’s economy, including:
- Commercial. This money is created when banks leverage the fractional reserve and make loans up to 10 times more than the value of the actual base currency.
- Fiduciary. These are bank notes, cheques, and drafts. These are not real money, but their issuer guarantees to exchange them for fiat or commodity money once requested.
- Fiat. Or paper money. It’s a government-issued currency that is not backed by any commodity.
- Commodity. It’s the oldest type of money whose value is derived from a commodity.
Discover more financial opportunities with The Standard
Inflation opens the door to a new world of finance, all you need to do is catch the wave and ride it as far as you’re able. With The Standard, you can use the power of inflation to grow your capital. Take a loan at a low-interest rate and invest the borrowed money into real estate, gold, or other commodities. Unlike bank loans, there is no entity that can re-negotiate the rates to match the inflation. Everything is fixed in a bulletproof smart contract.
Stay tuned for more tips and tricks to offset inflation with The Standard.
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