Amazing Kids! Magazine

Inflation, Hyperinflation, and Stagflation

By Victoria Feng, Money Smarts and AKOM Editor

 

These days, a quarter won’t get you much. But as my classmate has reminded me, you can still buy a gumball. While I pointed out that five dollars gets you a whole pack, I guess one gumball was good enough. The point is, quarters are not always considered a special treat. I remember reading the “Little House on the Prairie” series a few years ago. In the one that focuses on Almanzo Wilder’s life as a kid, Almanzo’s father gives him a half-dollar to buy a pig or buy lots of lemonade. I have never bought a pig – but I can guarantee it doesn’t cost fifty cents today. Otherwise, farmers who sell pork would be super poor. Almanzo grew up in the 1800’s and quite a lot has changed since then. But from a pig to two gumballs, how can we explain this? To put it in one word: inflation.

Unfortunately, inflation is not simple. There are so many reasons for what causes inflation. If you inflate a balloon or tire essentially you are pumping air and the balloon/tire gets bigger. That’s how I like to think of inflation. You start out with a small pile of money to buy a certain thing, like a pig, and as time progresses the pile gets bigger because it costs more money to buy the same thing over time. Sure you may be earning more, but the point is that each bill or coin is worth less. Sometimes, inflation is taken to the extreme. For example, it costs almost a thousand Zimbabwean dollars for a loaf of bread in Zimbabwe. Wow!

One of the common terms used when talking about inflation is the feedback loop. I personally like to think of it as a cycle that only gets bigger and bigger. While inflation is usually categorized as bad, countries with good economies may experience it too. The feedback loop is just one way of explaining inflation out of many. No one has really discovered a sole reason or sequence of events that make inflation happen. Everyone likes having jobs and getting paid more, right? So people will say that in a good, growing, economy, the unemployment rate is decreasing. So when there’s more employment, more money is handed out to employees. There will also be more employees demanding higher salaries. Workers in other fields will also be earning more money and will spend a portion on goods and services. Companies will be earning more money too and might give raises. Since people have money to spend, there will be more demand for these items. Companies see this and think, why don’t we raise the prices? After all, one of the simplest “economic patterns” as I call them – supply and demand – shows us that when the demand is high and the supply is low, the price will be pushed higher. There is not necessarily a scarcity, but let’s just assume that the demand is super high while the supply is high. Since people have money, the dollar or currency XYZ will be less valuable.

All of what I have been talking about is very abstract, with no guaranteed reason. But inflation has happened and is very real. In this paragraph I’m going to talk about one prominent example. After World War I was over, Germany was ordered to pay reparations. Reparations are what a country has to pay after they lose a war. The amount paid is determined by the winners. On top of that, they had to fix their roads and other areas that had been damaged. Since they lost the war, Germany was already in a state of turmoil. This caused Germany to experience hyperinflation. At one point, a trillion Marks (former German currency) equaled one US dollar. Citizens didn’t bother with taking change since a few dollars didn’t matter much. Sometimes they bartered, but other times it got so ruthless that people started stealing goods from each other (not money). Ultimately this led to World War II.

Another word related to inflation is stagflation. To figure out what stagflation means, let’s break it into two parts: stag- and -flation. If someone is staggering in a class, it would mean that he or she isn’t doing well and since we’re talking about economics, the country might be having an economic crisis. –flation is part of the word inflation. I have already said that inflation means an increase in prices. Stagflation would technically mean a country has a bad economy but is still raising prices. That may seem self-contradictory, but there are reasons for this. Think of one of the simplest economic “patterns”: supply and demand. One of the biggest examples of stagflation was in the 1970’s when there was an oil crisis. America and OAPEC had an embargo, causing America to have a shortage of oil. Due to the scarcity, oil prices quadrupled. You need oil to fuel vehicles, so transporting goods got more expensive, and so goods became more expensive too.

After reading this article, I hope you have learned some (more) things about inflation. First, inflation is an economic term (at least in this article it is) for when goods and services get more expensive because a currency’s value decreases. Then I wrote about hyperinflation, which has the same meaning as inflation but is taken to more extreme levels. Finally, I focused on stagflation. It’s an interesting concept where while a country is having an economic crisis, its prices are still rising.

Remember to check out the Money Smarts contest that is running this month!  Write a story about a character that learns a money lesson. Submit entries to money.smarts@amazing-kids.org.

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