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Inflation Stories

by Elaine Schwartz    •    Oct 3, 2010    •    371 Views

Arrive at a supermarket at the same time everyday? Require cash instead of credit?  Stop making beer? Why?

The answer to each question is INFLATION.

We are told that the Fed is always worried about inflation. If you know that you should worry too but were not really sure why, I recommend a recent NPR Planet Money podcast about Brazil. 

During the 1950s, Brazil printed a lot of money to pay for building Brazilia, their new capital. With more currency circulating, too many Cruzeiros were chasing too few goods and inflation developed. Expecting it to continue, businesses raised prices, workers wanted higher wages, and consumers made purchases sooner. The result? Price and wage hikes accelerated. Finally, by the early 1990s, according to Planet Money, the monthly inflation rate was 80%. That meant that during 1 month, the price of a $1.00 carton of eggs would become $2.00.

Out of control inflation is like a virus that multiplies. Responding, supermarkets have to reprice items daily. Knowing that food will get new price stickers at 9:00 each day, shoppers arrive at 8:30. You can see why businesses would avoid giving credit. By the time they got paid, the purchase price would have changed substantially. Similarly, one Brazilian beer maker stopped production because the connection between his costs and pricing became impossible to calculate. 

According to Johns Hopkins economist Steve Hanke, in Zimbabwe, with a daily inflation rate of 98% and a monthly rate of 79,600,000,000%, it took 24.7 hours for prices to double during November, 2008. However, Hungary holds the record with a daily inflation rate of 195% during July, 1946.

The Economic Lesson

Textbooks say that inflation has three basic causes. 1) Too many dollars chasing too few goods is called “demand pull” inflation. 2) When the cost of land, labor, and/or capital rises, we have “cost push” inflation. 3) Inflation also can result when one item that is central to an economy, such as oil, becomes more expensive.

With an inflation rate that is now close to 5%, Brazil has been controlling its causes.

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