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Episode
157

Inflation

May 11, 2021
Economics
-
21
minutes
Economics
Business
UK politics
Income inequality
Gold
Politics

It's the idea that prices go up over time, but what actually causes it to happen?

Is it a good, or a bad thing, and what would happen if there were no inflation?

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[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:16] I'm Alastair Budge and today we are going to be talking about Inflation.

[00:00:27] Now, the word inflation probably doesn’t sound particularly interesting to you, but it is actually a really interesting phenomenon.

[00:00:36] And, it is one that affects every single one of us.

[00:00:40] Prices rise, and sometimes go down. 

[00:00:43] The money in your pocket might buy more or less of something at any given point in time.

[00:00:49] So today we are going to try to understand why that actually happens. 

[00:00:55] What actually is inflation?

[00:00:57] What causes it to happen? 

[00:00:59] Is it a good, or a bad thing? 

[00:01:02] And what can you do about it?

[00:01:04] It’s a really interesting subject, so let’s get stuck in right away.

[00:01:10] Inflation is something that is relevant to all of us, and is a good thing to understand at any point in time.

[00:01:17] But I thought that now is a particularly pertinent time, a particularly important time, to understand it, for a few reasons.

[00:01:27] Firstly, governments around the world are printing vast amounts of money to stimulate economies that have been hit badly by COVID-19. 

[00:01:36] If there is more money that exists, then each unit of money, typically, is worth less, and prices tend to rise.

[00:01:45] Secondly, in almost all of the episodes where we talk about the price of something in the past, I try to explain what that number would be in today’s money. 

[00:01:55] I wanted to explore this theme a little bit, as it’s really interesting to ask ourselves what actually causes the price of things to go up.

[00:02:05] And a final reason is related to the relationship between inflation, wages, and political stability. 

[00:02:13] In this point we’ll explore the reason that a pay rise doesn’t always mean an actual pay rise, as nurses in Britain recently found out.

[00:02:23] So, now is the time to explore this fascinating, and very important subject.

[00:02:29] No matter how old you are, you probably have memories from your childhood of how much certain things cost. 

[00:02:36] And the costs, whether that’s for your favourite chocolate bar, for a magazine you used to buy, or for a toy, will almost undoubtedly have been lower when you were a child compared to what they are now.

[00:02:50] I’ll give you a few examples from my childhood. 

[00:02:53] There was a comic book I used to read called The Beano. I can remember clearly that it used to cost 38p, 38 pence, I guess in around 1995.

[00:03:06] I just checked now and it’s £2.75, it’s now 7 times more expensive.

[00:03:12] One of the most popular toys, when I was about 6 or 7 was something called a Mighty Max. 

[00:03:19] It cost £5. 

[00:03:21] It doesn’t seem like you can buy them anymore, but similar toys are around £30 to £40. 

[00:03:28] Now, I was born in 1987, not so long ago, in a country that hasn’t experienced high inflation in my lifetime, but depending on when you were born, and the country you live in, prices might have gone up 10, 100, 1000 times compared to when you were growing up.

[00:03:48] You get the picture

[00:03:50] The price of stuff goes up.

[00:03:52] The term for this is inflation, and in this case it’s consumer price inflation, an increase in the price that we, as consumers, pay for goods and services.

[00:04:04] So, let’s dig down into why this actually is.

[00:04:09] There is no central person or government official telling the magazine or the toy shop that they should increase their prices. 

[00:04:17] They increase prices either because they need to, because their costs have increased, or because they can, because there are enough people who are prepared to pay these higher prices.

[00:04:30] There are, in general, three different categories of reasons for inflation, according to economists.

[00:04:37] The first is what they call “Cost-push inflation”. 

[00:04:41] The idea is that the costs for businesses have increased, therefore they need to pass on these costs to customers in order to still make a profit.

[00:04:52] There are thousands of reasons why costs might have increased, from workers asking for higher wages to bad weather, from a ship getting stuck in the Suez canal through to political conflict.

[00:05:05] In my example of the Beano magazine, if the cost of paper increases, if the people who draw the comics are paid more, and if the rent in the shop where I buy the comic book goes up, well the shop will need to charge me more than 38p. 

[00:05:21] So, that’s the first reason, “Cost-push inflation”.

[00:05:26] The second category is what’s called “Demand-Pull Inflation”.

[00:05:30] This is what happens when people have more money, and the demand for something increases.

[00:05:36] If we go back to our example of my Beano magazine, imagine that instead of one 8-year-old Alastair wanting to buy a copy of the Beano, there are 10,000 other little boys wanting to buy a copy, and only 1,000 that exist.

[00:05:53] The magazine could say, well, let’s see how much these little boys really want their copy of the Beano, and let’s increase the price to 48p. 

[00:06:03] 1,000 little boys dutifully buy the magazine at 48p, and so the price becomes 48p.

[00:06:12] Of course, this is a simplistic example, but for goods such as chocolate, it is a very real example. 

[00:06:21] Demand for chocolate has boomed in the past decade, as consumers in countries such as India and China now have the disposable income to buy it.

[00:06:31] And if the amount of chocolate being produced increases at a lower rate than the amount of people who want to buy it, then the price is likely to go up.

[00:06:41] If you are a long-term chocolate lover, no doubt you will have noticed that the price you pay for it has been going up.

[00:06:49] And the final reason or final category is what’s called “Built-In Inflation”. 

[00:06:56] This is essentially the idea that people expect the prices to go up, so they go up. 

[00:07:03] If you have lived in a society where prices do go up, and wages go up, then that’s what they do.

[00:07:09] Prices go up, therefore wages go up, therefore people have more money, so they spend more, so prices go up, and the circle continues.

[00:07:18] So, these are some of the broad causes of inflation, according to economists.

[00:07:24] We aren’t going to go into huge detail on the specifics of how inflation is calculated, but it’s worth spending just a couple of minutes addressing the subject, as newspaper headlines and TV news programmes are filled with statistics about inflation, but it’s not always exactly clear what they mean.

[00:07:46] Essentially, there are different ways to measure inflation, but the one that’s most commonly used is something called a Consumer Price Index.

[00:07:55] What this does is calculate the total cost of a selection of different things that people buy, from bread and milk through to medicine, mobile phone contracts, and so on.

[00:08:08] The price for everything is added up, adjusted for how regularly you buy it and how much of it you buy, and you get a number at the end.

[00:08:18] For sake of ease, let’s say the number is 100.

[00:08:22] If next year the number for the same basket of goods is 103, then the rate of inflation is 3%. 

[00:08:31] Simple, right?

[00:08:32] It might be simple to calculate, but understanding it and controlling it isn’t quite so easy.

[00:08:40] And this brings us nicely on to our next question. 

[00:08:44] Is inflation good or bad? 

[00:08:46] Should we be happy that prices are rising, or should we not?

[00:08:51] Of course, there are multiple different theories about this, and the answer depends on who you speak to, and how much the price rises.

[00:09:00] There are many instances in history of hyperinflation, when the price rises at an uncontrollable level, and that is undoubtedly a bad thing.

[00:09:11] You are probably familiar with the examples of Weimar Germany, of Zimbabwe, and more recently, of Venezuela.

[00:09:20] In all of those countries the price of goods started rising quickly, then more quickly, and before long there was a situation where you had to carry money in large suitcases just to buy a loaf of bread.

[00:09:33] Obviously, that’s a terrible thing for an economy and a society.

[00:09:38] It means that any money you have is soon worthless, and a society without any viable means of exchange runs into huge problems.

[00:09:49] But, there is an argument that inflation, at a low level, between 1 and 3%, is a positive thing for an economy.

[00:09:59] Why? 

[00:10:00] Because it encourages people with savings to invest their money in productive things that will help grow the economy.

[00:10:08] Let’s say inflation is at 3% and you have €100,000. 

[00:10:14] In 1 year you will need to have €103,000 to buy what your €100,000 would have bought today. 

[00:10:22] In 10 years you would need to have €134,000 to buy what you could buy today for €100,000.

[00:10:31] So, instead of leaving money in a bank, you might invest it in a business, in the stock market, or you could just buy stuff, because you know that your money is worth less and less every year, so it is in your advantage to spend it now rather than later. 

[00:10:48] And spending money is what turns the wheels of the economy.

[00:10:53] Now, if you don’t have savings, or money sitting in the bank, then inflation only really matters to you if your salary increases at a lower rate than inflation. 

[00:11:05] I mean, if the money you make every month increases more slowly than the prices increase.

[00:11:11] If your salary increases at a higher rate than inflation, and assuming that the rate of tax remains the same, then you will end up being able to buy more every month.

[00:11:23] Let’s take another example here, because unfortunately my Beano comic book one won’t work in this case.

[00:11:29] Let’s say that you have expenses of €1,000 every month, and you have a salary of €1,500. 

[00:11:37] Every month you spend €1,000 on things you need, and you have another €500 for things you want.

[00:11:45] If the price of everything increases by 10%, you might think “oh, no, I’m going to have to spend €1,100 a month buying exactly what I used to spend €1,000 on”. 

[00:11:58] But if your salary increases at 15%, let’s say, you now have €1,725, you can still cover your expenses, and you now have €625 for everything else.

[00:12:13] You’re ok.

[00:12:14] Now, the point here is that inflation is important if it increases at a higher rate than your salary.

[00:12:22] If you live in the UK, or you follow UK news, you might have seen that this problem has been something that has been all over the news in the past few months.

[00:12:32] The Prime Minister, Boris Johnson, announced that nurses would be receiving a 1% pay rise next year. 

[00:12:40] Although he was no doubt hoping to be congratulated for this, because who doesn’t support nurses being paid more, especially after what must have been a horrific year, he was widely criticised for this.

[00:12:54] Why? 

[00:12:55] Because the target for UK inflation is 2%, and this year it has been around 1%, meaning that this isn’t a pay rise at all. 

[00:13:06] If your salary goes up by 1% but the cost of everything else has gone up by more than 1%, the number on your payslip might have increased, but so have the numbers at the supermarket, so you can’t buy anything more than before.

[00:13:21] Now, this brings us back to an important point, and it’s about the value of money, and why money only works if you trust the government to do a good job of managing the economy.

[00:13:34] Until 1931, the UK had something called the gold standard. 

[00:13:39] This meant that every pound that existed was backed by gold that the government kept in its vaults.

[00:13:47] Your paper money could be swapped for gold, it could be exchanged for a physical object, guaranteed by the government.

[00:13:56] In 1931 the UK abolished the gold standard, meaning that a pound on its own is now worthless, really. 

[00:14:05] You can’t go to the Bank of England and say ‘can I swap my pound for gold?’, they would smile at you nicely and politely ask you to leave the building.

[00:14:15] The value of money, whether this is pounds, Euros, dollars, or any other currency, is only because you can use it to do things you actually need or want to do, whether that’s buying bread at a baker, paying rent to your landlord, or anything else you so choose.

[00:14:34] The actual number in your bank account or on your payslip is irrelevant; the only thing that matters is what you can do with it.

[00:14:43] The deal that we all implicitly make is that we trust that our money won’t lose its value too quickly, and for that to happen, the government needs to keep a very close eye on inflation.

[00:14:57] One of the main roles of government is to control inflation, precisely so that it remains at a steady rate, and people can trust what their money will be worth in the future.

[00:15:08] Controlling inflation means political stability.

[00:15:12] If it’s too high, well it runs the risk of running out of control and becoming hyperinflation, as was the case in places such as Weimar Germany, Zimbabwe and Venezuela. 

[00:15:24] In all of these countries the currency became worthless, the state essentially collapsed, and in the case of Weimar Germany it cleared a path for the rise of Hitler and the Nazi party.

[00:15:38] Indeed, the country in Europe that is probably most afraid of high inflation is Germany, given that it experienced firsthand what high inflation rates can lead to.

[00:15:50] But, what if there were no inflation? 

[00:15:53] What if there were a way to stop this happening, and to stop prices rising?

[00:15:59] Well, there sort of is. 

[00:16:01] The opposite of inflation is called deflation, and it’s like inflation but in reverse. Every year things get a little bit cheaper. 

[00:16:10] Every year wages tend to reduce

[00:16:13] And if you are thinking that this is just theoretical, it’s not. 

[00:16:18] Japan has been undergoing a period of deflation on and off since the 1990s, and has struggled to get out of it. 

[00:16:27] It isn’t quite so tragic as hyperinflation, but once deflation starts, it’s very hard to turn it around.

[00:16:35] In a country with deflation, your money becomes more and more valuable over time, which means there is less of an incentive to spend or invest, so the economy doesn’t grow as fast. 

[00:16:48] And that is exactly what Japan has been suffering from. 

[00:16:51] Its economy has been almost flat over the past 30 years while the US economy, for example, has tripled in size.

[00:17:02] Now, I want to finish this exploration into the word of inflation with a brief discussion of the relationship between bitcoin and inflation. 

[00:17:12] Episode 122 from a few months ago goes into this in much greater detail, so I’d recommend listening to that if you’re interested in exploring this area further.

[00:17:24] One of the main reasons believers in Bitcoin are so fanatical about it is that it doesn’t suffer from inflation. 

[00:17:31] There are a fixed number of bitcoins in existence, so, unlike dollars, pounds or Euros, you can’t add more bitcoin to the monetary system.

[00:17:42] One of the causes of inflation, as we learned about earlier with the Demand-Pull Effect, is due to there being more money in circulation so that prices go up.

[00:17:53] This can’t happen with bitcoin, because the quantity of bitcoin is fixed.

[00:17:58] Now, an important point to note is that, although the bitcoin price has increased significantly, this isn’t due to price inflation; in fact, you now need significantly fewer bitcoin to buy the same amount of things as a few years ago.

[00:18:15] 1 bitcoin 10 years ago might have bought you a slice of pizza. Now it will buy you a Porsche.

[00:18:22] OK, if you have got this far, congratulations, it’s been quite an economics-heavy episode, and I know there is quite a lot of jargon, of complex terminology in there.

[00:18:34] The reality is that inflation is still something that we don’t completely understand.

[00:18:40] Economics isn’t an exact science, and if you look at a chart, a graph of inflation over time, it jumps up and down seemingly randomly. 

[00:18:51] Economists and policymakers have ideas about how to control it, but really there are millions of different factors that influence it. 

[00:19:00] Economics is really a social science that tries to understand human behaviour.

[00:19:07] And we human beings are unreliable and unpredictable, and the world is an unstable place.

[00:19:15] The bargain that we all make is that we trust the government to keep inflation under control. Normally, governments manage this quite well. 

[00:19:24] But when they don’t, well you just need to look at Weimar Germany, Zimbabwe, or Venezuela to see what the consequences can be.

[00:19:34] OK then, that is it for today's episode on inflation.

[00:19:39] I hope it's been an interesting one, that you've learnt something new, and the next time you see that the price has gone up for your favourite chocolate bar, your favourite magazine, or your landlord, then perhaps this will give you an idea about some of the reasons why that might be.

[00:19:56] As always, I would love to know what you thought of this episode, especially if you have lived either in a country or through a period of high inflation. 

[00:20:06] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:20:16] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:20:21] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.



[END OF EPISODE]


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[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:16] I'm Alastair Budge and today we are going to be talking about Inflation.

[00:00:27] Now, the word inflation probably doesn’t sound particularly interesting to you, but it is actually a really interesting phenomenon.

[00:00:36] And, it is one that affects every single one of us.

[00:00:40] Prices rise, and sometimes go down. 

[00:00:43] The money in your pocket might buy more or less of something at any given point in time.

[00:00:49] So today we are going to try to understand why that actually happens. 

[00:00:55] What actually is inflation?

[00:00:57] What causes it to happen? 

[00:00:59] Is it a good, or a bad thing? 

[00:01:02] And what can you do about it?

[00:01:04] It’s a really interesting subject, so let’s get stuck in right away.

[00:01:10] Inflation is something that is relevant to all of us, and is a good thing to understand at any point in time.

[00:01:17] But I thought that now is a particularly pertinent time, a particularly important time, to understand it, for a few reasons.

[00:01:27] Firstly, governments around the world are printing vast amounts of money to stimulate economies that have been hit badly by COVID-19. 

[00:01:36] If there is more money that exists, then each unit of money, typically, is worth less, and prices tend to rise.

[00:01:45] Secondly, in almost all of the episodes where we talk about the price of something in the past, I try to explain what that number would be in today’s money. 

[00:01:55] I wanted to explore this theme a little bit, as it’s really interesting to ask ourselves what actually causes the price of things to go up.

[00:02:05] And a final reason is related to the relationship between inflation, wages, and political stability. 

[00:02:13] In this point we’ll explore the reason that a pay rise doesn’t always mean an actual pay rise, as nurses in Britain recently found out.

[00:02:23] So, now is the time to explore this fascinating, and very important subject.

[00:02:29] No matter how old you are, you probably have memories from your childhood of how much certain things cost. 

[00:02:36] And the costs, whether that’s for your favourite chocolate bar, for a magazine you used to buy, or for a toy, will almost undoubtedly have been lower when you were a child compared to what they are now.

[00:02:50] I’ll give you a few examples from my childhood. 

[00:02:53] There was a comic book I used to read called The Beano. I can remember clearly that it used to cost 38p, 38 pence, I guess in around 1995.

[00:03:06] I just checked now and it’s £2.75, it’s now 7 times more expensive.

[00:03:12] One of the most popular toys, when I was about 6 or 7 was something called a Mighty Max. 

[00:03:19] It cost £5. 

[00:03:21] It doesn’t seem like you can buy them anymore, but similar toys are around £30 to £40. 

[00:03:28] Now, I was born in 1987, not so long ago, in a country that hasn’t experienced high inflation in my lifetime, but depending on when you were born, and the country you live in, prices might have gone up 10, 100, 1000 times compared to when you were growing up.

[00:03:48] You get the picture

[00:03:50] The price of stuff goes up.

[00:03:52] The term for this is inflation, and in this case it’s consumer price inflation, an increase in the price that we, as consumers, pay for goods and services.

[00:04:04] So, let’s dig down into why this actually is.

[00:04:09] There is no central person or government official telling the magazine or the toy shop that they should increase their prices. 

[00:04:17] They increase prices either because they need to, because their costs have increased, or because they can, because there are enough people who are prepared to pay these higher prices.

[00:04:30] There are, in general, three different categories of reasons for inflation, according to economists.

[00:04:37] The first is what they call “Cost-push inflation”. 

[00:04:41] The idea is that the costs for businesses have increased, therefore they need to pass on these costs to customers in order to still make a profit.

[00:04:52] There are thousands of reasons why costs might have increased, from workers asking for higher wages to bad weather, from a ship getting stuck in the Suez canal through to political conflict.

[00:05:05] In my example of the Beano magazine, if the cost of paper increases, if the people who draw the comics are paid more, and if the rent in the shop where I buy the comic book goes up, well the shop will need to charge me more than 38p. 

[00:05:21] So, that’s the first reason, “Cost-push inflation”.

[00:05:26] The second category is what’s called “Demand-Pull Inflation”.

[00:05:30] This is what happens when people have more money, and the demand for something increases.

[00:05:36] If we go back to our example of my Beano magazine, imagine that instead of one 8-year-old Alastair wanting to buy a copy of the Beano, there are 10,000 other little boys wanting to buy a copy, and only 1,000 that exist.

[00:05:53] The magazine could say, well, let’s see how much these little boys really want their copy of the Beano, and let’s increase the price to 48p. 

[00:06:03] 1,000 little boys dutifully buy the magazine at 48p, and so the price becomes 48p.

[00:06:12] Of course, this is a simplistic example, but for goods such as chocolate, it is a very real example. 

[00:06:21] Demand for chocolate has boomed in the past decade, as consumers in countries such as India and China now have the disposable income to buy it.

[00:06:31] And if the amount of chocolate being produced increases at a lower rate than the amount of people who want to buy it, then the price is likely to go up.

[00:06:41] If you are a long-term chocolate lover, no doubt you will have noticed that the price you pay for it has been going up.

[00:06:49] And the final reason or final category is what’s called “Built-In Inflation”. 

[00:06:56] This is essentially the idea that people expect the prices to go up, so they go up. 

[00:07:03] If you have lived in a society where prices do go up, and wages go up, then that’s what they do.

[00:07:09] Prices go up, therefore wages go up, therefore people have more money, so they spend more, so prices go up, and the circle continues.

[00:07:18] So, these are some of the broad causes of inflation, according to economists.

[00:07:24] We aren’t going to go into huge detail on the specifics of how inflation is calculated, but it’s worth spending just a couple of minutes addressing the subject, as newspaper headlines and TV news programmes are filled with statistics about inflation, but it’s not always exactly clear what they mean.

[00:07:46] Essentially, there are different ways to measure inflation, but the one that’s most commonly used is something called a Consumer Price Index.

[00:07:55] What this does is calculate the total cost of a selection of different things that people buy, from bread and milk through to medicine, mobile phone contracts, and so on.

[00:08:08] The price for everything is added up, adjusted for how regularly you buy it and how much of it you buy, and you get a number at the end.

[00:08:18] For sake of ease, let’s say the number is 100.

[00:08:22] If next year the number for the same basket of goods is 103, then the rate of inflation is 3%. 

[00:08:31] Simple, right?

[00:08:32] It might be simple to calculate, but understanding it and controlling it isn’t quite so easy.

[00:08:40] And this brings us nicely on to our next question. 

[00:08:44] Is inflation good or bad? 

[00:08:46] Should we be happy that prices are rising, or should we not?

[00:08:51] Of course, there are multiple different theories about this, and the answer depends on who you speak to, and how much the price rises.

[00:09:00] There are many instances in history of hyperinflation, when the price rises at an uncontrollable level, and that is undoubtedly a bad thing.

[00:09:11] You are probably familiar with the examples of Weimar Germany, of Zimbabwe, and more recently, of Venezuela.

[00:09:20] In all of those countries the price of goods started rising quickly, then more quickly, and before long there was a situation where you had to carry money in large suitcases just to buy a loaf of bread.

[00:09:33] Obviously, that’s a terrible thing for an economy and a society.

[00:09:38] It means that any money you have is soon worthless, and a society without any viable means of exchange runs into huge problems.

[00:09:49] But, there is an argument that inflation, at a low level, between 1 and 3%, is a positive thing for an economy.

[00:09:59] Why? 

[00:10:00] Because it encourages people with savings to invest their money in productive things that will help grow the economy.

[00:10:08] Let’s say inflation is at 3% and you have €100,000. 

[00:10:14] In 1 year you will need to have €103,000 to buy what your €100,000 would have bought today. 

[00:10:22] In 10 years you would need to have €134,000 to buy what you could buy today for €100,000.

[00:10:31] So, instead of leaving money in a bank, you might invest it in a business, in the stock market, or you could just buy stuff, because you know that your money is worth less and less every year, so it is in your advantage to spend it now rather than later. 

[00:10:48] And spending money is what turns the wheels of the economy.

[00:10:53] Now, if you don’t have savings, or money sitting in the bank, then inflation only really matters to you if your salary increases at a lower rate than inflation. 

[00:11:05] I mean, if the money you make every month increases more slowly than the prices increase.

[00:11:11] If your salary increases at a higher rate than inflation, and assuming that the rate of tax remains the same, then you will end up being able to buy more every month.

[00:11:23] Let’s take another example here, because unfortunately my Beano comic book one won’t work in this case.

[00:11:29] Let’s say that you have expenses of €1,000 every month, and you have a salary of €1,500. 

[00:11:37] Every month you spend €1,000 on things you need, and you have another €500 for things you want.

[00:11:45] If the price of everything increases by 10%, you might think “oh, no, I’m going to have to spend €1,100 a month buying exactly what I used to spend €1,000 on”. 

[00:11:58] But if your salary increases at 15%, let’s say, you now have €1,725, you can still cover your expenses, and you now have €625 for everything else.

[00:12:13] You’re ok.

[00:12:14] Now, the point here is that inflation is important if it increases at a higher rate than your salary.

[00:12:22] If you live in the UK, or you follow UK news, you might have seen that this problem has been something that has been all over the news in the past few months.

[00:12:32] The Prime Minister, Boris Johnson, announced that nurses would be receiving a 1% pay rise next year. 

[00:12:40] Although he was no doubt hoping to be congratulated for this, because who doesn’t support nurses being paid more, especially after what must have been a horrific year, he was widely criticised for this.

[00:12:54] Why? 

[00:12:55] Because the target for UK inflation is 2%, and this year it has been around 1%, meaning that this isn’t a pay rise at all. 

[00:13:06] If your salary goes up by 1% but the cost of everything else has gone up by more than 1%, the number on your payslip might have increased, but so have the numbers at the supermarket, so you can’t buy anything more than before.

[00:13:21] Now, this brings us back to an important point, and it’s about the value of money, and why money only works if you trust the government to do a good job of managing the economy.

[00:13:34] Until 1931, the UK had something called the gold standard. 

[00:13:39] This meant that every pound that existed was backed by gold that the government kept in its vaults.

[00:13:47] Your paper money could be swapped for gold, it could be exchanged for a physical object, guaranteed by the government.

[00:13:56] In 1931 the UK abolished the gold standard, meaning that a pound on its own is now worthless, really. 

[00:14:05] You can’t go to the Bank of England and say ‘can I swap my pound for gold?’, they would smile at you nicely and politely ask you to leave the building.

[00:14:15] The value of money, whether this is pounds, Euros, dollars, or any other currency, is only because you can use it to do things you actually need or want to do, whether that’s buying bread at a baker, paying rent to your landlord, or anything else you so choose.

[00:14:34] The actual number in your bank account or on your payslip is irrelevant; the only thing that matters is what you can do with it.

[00:14:43] The deal that we all implicitly make is that we trust that our money won’t lose its value too quickly, and for that to happen, the government needs to keep a very close eye on inflation.

[00:14:57] One of the main roles of government is to control inflation, precisely so that it remains at a steady rate, and people can trust what their money will be worth in the future.

[00:15:08] Controlling inflation means political stability.

[00:15:12] If it’s too high, well it runs the risk of running out of control and becoming hyperinflation, as was the case in places such as Weimar Germany, Zimbabwe and Venezuela. 

[00:15:24] In all of these countries the currency became worthless, the state essentially collapsed, and in the case of Weimar Germany it cleared a path for the rise of Hitler and the Nazi party.

[00:15:38] Indeed, the country in Europe that is probably most afraid of high inflation is Germany, given that it experienced firsthand what high inflation rates can lead to.

[00:15:50] But, what if there were no inflation? 

[00:15:53] What if there were a way to stop this happening, and to stop prices rising?

[00:15:59] Well, there sort of is. 

[00:16:01] The opposite of inflation is called deflation, and it’s like inflation but in reverse. Every year things get a little bit cheaper. 

[00:16:10] Every year wages tend to reduce

[00:16:13] And if you are thinking that this is just theoretical, it’s not. 

[00:16:18] Japan has been undergoing a period of deflation on and off since the 1990s, and has struggled to get out of it. 

[00:16:27] It isn’t quite so tragic as hyperinflation, but once deflation starts, it’s very hard to turn it around.

[00:16:35] In a country with deflation, your money becomes more and more valuable over time, which means there is less of an incentive to spend or invest, so the economy doesn’t grow as fast. 

[00:16:48] And that is exactly what Japan has been suffering from. 

[00:16:51] Its economy has been almost flat over the past 30 years while the US economy, for example, has tripled in size.

[00:17:02] Now, I want to finish this exploration into the word of inflation with a brief discussion of the relationship between bitcoin and inflation. 

[00:17:12] Episode 122 from a few months ago goes into this in much greater detail, so I’d recommend listening to that if you’re interested in exploring this area further.

[00:17:24] One of the main reasons believers in Bitcoin are so fanatical about it is that it doesn’t suffer from inflation. 

[00:17:31] There are a fixed number of bitcoins in existence, so, unlike dollars, pounds or Euros, you can’t add more bitcoin to the monetary system.

[00:17:42] One of the causes of inflation, as we learned about earlier with the Demand-Pull Effect, is due to there being more money in circulation so that prices go up.

[00:17:53] This can’t happen with bitcoin, because the quantity of bitcoin is fixed.

[00:17:58] Now, an important point to note is that, although the bitcoin price has increased significantly, this isn’t due to price inflation; in fact, you now need significantly fewer bitcoin to buy the same amount of things as a few years ago.

[00:18:15] 1 bitcoin 10 years ago might have bought you a slice of pizza. Now it will buy you a Porsche.

[00:18:22] OK, if you have got this far, congratulations, it’s been quite an economics-heavy episode, and I know there is quite a lot of jargon, of complex terminology in there.

[00:18:34] The reality is that inflation is still something that we don’t completely understand.

[00:18:40] Economics isn’t an exact science, and if you look at a chart, a graph of inflation over time, it jumps up and down seemingly randomly. 

[00:18:51] Economists and policymakers have ideas about how to control it, but really there are millions of different factors that influence it. 

[00:19:00] Economics is really a social science that tries to understand human behaviour.

[00:19:07] And we human beings are unreliable and unpredictable, and the world is an unstable place.

[00:19:15] The bargain that we all make is that we trust the government to keep inflation under control. Normally, governments manage this quite well. 

[00:19:24] But when they don’t, well you just need to look at Weimar Germany, Zimbabwe, or Venezuela to see what the consequences can be.

[00:19:34] OK then, that is it for today's episode on inflation.

[00:19:39] I hope it's been an interesting one, that you've learnt something new, and the next time you see that the price has gone up for your favourite chocolate bar, your favourite magazine, or your landlord, then perhaps this will give you an idea about some of the reasons why that might be.

[00:19:56] As always, I would love to know what you thought of this episode, especially if you have lived either in a country or through a period of high inflation. 

[00:20:06] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:20:16] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:20:21] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.



[END OF EPISODE]


[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:16] I'm Alastair Budge and today we are going to be talking about Inflation.

[00:00:27] Now, the word inflation probably doesn’t sound particularly interesting to you, but it is actually a really interesting phenomenon.

[00:00:36] And, it is one that affects every single one of us.

[00:00:40] Prices rise, and sometimes go down. 

[00:00:43] The money in your pocket might buy more or less of something at any given point in time.

[00:00:49] So today we are going to try to understand why that actually happens. 

[00:00:55] What actually is inflation?

[00:00:57] What causes it to happen? 

[00:00:59] Is it a good, or a bad thing? 

[00:01:02] And what can you do about it?

[00:01:04] It’s a really interesting subject, so let’s get stuck in right away.

[00:01:10] Inflation is something that is relevant to all of us, and is a good thing to understand at any point in time.

[00:01:17] But I thought that now is a particularly pertinent time, a particularly important time, to understand it, for a few reasons.

[00:01:27] Firstly, governments around the world are printing vast amounts of money to stimulate economies that have been hit badly by COVID-19. 

[00:01:36] If there is more money that exists, then each unit of money, typically, is worth less, and prices tend to rise.

[00:01:45] Secondly, in almost all of the episodes where we talk about the price of something in the past, I try to explain what that number would be in today’s money. 

[00:01:55] I wanted to explore this theme a little bit, as it’s really interesting to ask ourselves what actually causes the price of things to go up.

[00:02:05] And a final reason is related to the relationship between inflation, wages, and political stability. 

[00:02:13] In this point we’ll explore the reason that a pay rise doesn’t always mean an actual pay rise, as nurses in Britain recently found out.

[00:02:23] So, now is the time to explore this fascinating, and very important subject.

[00:02:29] No matter how old you are, you probably have memories from your childhood of how much certain things cost. 

[00:02:36] And the costs, whether that’s for your favourite chocolate bar, for a magazine you used to buy, or for a toy, will almost undoubtedly have been lower when you were a child compared to what they are now.

[00:02:50] I’ll give you a few examples from my childhood. 

[00:02:53] There was a comic book I used to read called The Beano. I can remember clearly that it used to cost 38p, 38 pence, I guess in around 1995.

[00:03:06] I just checked now and it’s £2.75, it’s now 7 times more expensive.

[00:03:12] One of the most popular toys, when I was about 6 or 7 was something called a Mighty Max. 

[00:03:19] It cost £5. 

[00:03:21] It doesn’t seem like you can buy them anymore, but similar toys are around £30 to £40. 

[00:03:28] Now, I was born in 1987, not so long ago, in a country that hasn’t experienced high inflation in my lifetime, but depending on when you were born, and the country you live in, prices might have gone up 10, 100, 1000 times compared to when you were growing up.

[00:03:48] You get the picture

[00:03:50] The price of stuff goes up.

[00:03:52] The term for this is inflation, and in this case it’s consumer price inflation, an increase in the price that we, as consumers, pay for goods and services.

[00:04:04] So, let’s dig down into why this actually is.

[00:04:09] There is no central person or government official telling the magazine or the toy shop that they should increase their prices. 

[00:04:17] They increase prices either because they need to, because their costs have increased, or because they can, because there are enough people who are prepared to pay these higher prices.

[00:04:30] There are, in general, three different categories of reasons for inflation, according to economists.

[00:04:37] The first is what they call “Cost-push inflation”. 

[00:04:41] The idea is that the costs for businesses have increased, therefore they need to pass on these costs to customers in order to still make a profit.

[00:04:52] There are thousands of reasons why costs might have increased, from workers asking for higher wages to bad weather, from a ship getting stuck in the Suez canal through to political conflict.

[00:05:05] In my example of the Beano magazine, if the cost of paper increases, if the people who draw the comics are paid more, and if the rent in the shop where I buy the comic book goes up, well the shop will need to charge me more than 38p. 

[00:05:21] So, that’s the first reason, “Cost-push inflation”.

[00:05:26] The second category is what’s called “Demand-Pull Inflation”.

[00:05:30] This is what happens when people have more money, and the demand for something increases.

[00:05:36] If we go back to our example of my Beano magazine, imagine that instead of one 8-year-old Alastair wanting to buy a copy of the Beano, there are 10,000 other little boys wanting to buy a copy, and only 1,000 that exist.

[00:05:53] The magazine could say, well, let’s see how much these little boys really want their copy of the Beano, and let’s increase the price to 48p. 

[00:06:03] 1,000 little boys dutifully buy the magazine at 48p, and so the price becomes 48p.

[00:06:12] Of course, this is a simplistic example, but for goods such as chocolate, it is a very real example. 

[00:06:21] Demand for chocolate has boomed in the past decade, as consumers in countries such as India and China now have the disposable income to buy it.

[00:06:31] And if the amount of chocolate being produced increases at a lower rate than the amount of people who want to buy it, then the price is likely to go up.

[00:06:41] If you are a long-term chocolate lover, no doubt you will have noticed that the price you pay for it has been going up.

[00:06:49] And the final reason or final category is what’s called “Built-In Inflation”. 

[00:06:56] This is essentially the idea that people expect the prices to go up, so they go up. 

[00:07:03] If you have lived in a society where prices do go up, and wages go up, then that’s what they do.

[00:07:09] Prices go up, therefore wages go up, therefore people have more money, so they spend more, so prices go up, and the circle continues.

[00:07:18] So, these are some of the broad causes of inflation, according to economists.

[00:07:24] We aren’t going to go into huge detail on the specifics of how inflation is calculated, but it’s worth spending just a couple of minutes addressing the subject, as newspaper headlines and TV news programmes are filled with statistics about inflation, but it’s not always exactly clear what they mean.

[00:07:46] Essentially, there are different ways to measure inflation, but the one that’s most commonly used is something called a Consumer Price Index.

[00:07:55] What this does is calculate the total cost of a selection of different things that people buy, from bread and milk through to medicine, mobile phone contracts, and so on.

[00:08:08] The price for everything is added up, adjusted for how regularly you buy it and how much of it you buy, and you get a number at the end.

[00:08:18] For sake of ease, let’s say the number is 100.

[00:08:22] If next year the number for the same basket of goods is 103, then the rate of inflation is 3%. 

[00:08:31] Simple, right?

[00:08:32] It might be simple to calculate, but understanding it and controlling it isn’t quite so easy.

[00:08:40] And this brings us nicely on to our next question. 

[00:08:44] Is inflation good or bad? 

[00:08:46] Should we be happy that prices are rising, or should we not?

[00:08:51] Of course, there are multiple different theories about this, and the answer depends on who you speak to, and how much the price rises.

[00:09:00] There are many instances in history of hyperinflation, when the price rises at an uncontrollable level, and that is undoubtedly a bad thing.

[00:09:11] You are probably familiar with the examples of Weimar Germany, of Zimbabwe, and more recently, of Venezuela.

[00:09:20] In all of those countries the price of goods started rising quickly, then more quickly, and before long there was a situation where you had to carry money in large suitcases just to buy a loaf of bread.

[00:09:33] Obviously, that’s a terrible thing for an economy and a society.

[00:09:38] It means that any money you have is soon worthless, and a society without any viable means of exchange runs into huge problems.

[00:09:49] But, there is an argument that inflation, at a low level, between 1 and 3%, is a positive thing for an economy.

[00:09:59] Why? 

[00:10:00] Because it encourages people with savings to invest their money in productive things that will help grow the economy.

[00:10:08] Let’s say inflation is at 3% and you have €100,000. 

[00:10:14] In 1 year you will need to have €103,000 to buy what your €100,000 would have bought today. 

[00:10:22] In 10 years you would need to have €134,000 to buy what you could buy today for €100,000.

[00:10:31] So, instead of leaving money in a bank, you might invest it in a business, in the stock market, or you could just buy stuff, because you know that your money is worth less and less every year, so it is in your advantage to spend it now rather than later. 

[00:10:48] And spending money is what turns the wheels of the economy.

[00:10:53] Now, if you don’t have savings, or money sitting in the bank, then inflation only really matters to you if your salary increases at a lower rate than inflation. 

[00:11:05] I mean, if the money you make every month increases more slowly than the prices increase.

[00:11:11] If your salary increases at a higher rate than inflation, and assuming that the rate of tax remains the same, then you will end up being able to buy more every month.

[00:11:23] Let’s take another example here, because unfortunately my Beano comic book one won’t work in this case.

[00:11:29] Let’s say that you have expenses of €1,000 every month, and you have a salary of €1,500. 

[00:11:37] Every month you spend €1,000 on things you need, and you have another €500 for things you want.

[00:11:45] If the price of everything increases by 10%, you might think “oh, no, I’m going to have to spend €1,100 a month buying exactly what I used to spend €1,000 on”. 

[00:11:58] But if your salary increases at 15%, let’s say, you now have €1,725, you can still cover your expenses, and you now have €625 for everything else.

[00:12:13] You’re ok.

[00:12:14] Now, the point here is that inflation is important if it increases at a higher rate than your salary.

[00:12:22] If you live in the UK, or you follow UK news, you might have seen that this problem has been something that has been all over the news in the past few months.

[00:12:32] The Prime Minister, Boris Johnson, announced that nurses would be receiving a 1% pay rise next year. 

[00:12:40] Although he was no doubt hoping to be congratulated for this, because who doesn’t support nurses being paid more, especially after what must have been a horrific year, he was widely criticised for this.

[00:12:54] Why? 

[00:12:55] Because the target for UK inflation is 2%, and this year it has been around 1%, meaning that this isn’t a pay rise at all. 

[00:13:06] If your salary goes up by 1% but the cost of everything else has gone up by more than 1%, the number on your payslip might have increased, but so have the numbers at the supermarket, so you can’t buy anything more than before.

[00:13:21] Now, this brings us back to an important point, and it’s about the value of money, and why money only works if you trust the government to do a good job of managing the economy.

[00:13:34] Until 1931, the UK had something called the gold standard. 

[00:13:39] This meant that every pound that existed was backed by gold that the government kept in its vaults.

[00:13:47] Your paper money could be swapped for gold, it could be exchanged for a physical object, guaranteed by the government.

[00:13:56] In 1931 the UK abolished the gold standard, meaning that a pound on its own is now worthless, really. 

[00:14:05] You can’t go to the Bank of England and say ‘can I swap my pound for gold?’, they would smile at you nicely and politely ask you to leave the building.

[00:14:15] The value of money, whether this is pounds, Euros, dollars, or any other currency, is only because you can use it to do things you actually need or want to do, whether that’s buying bread at a baker, paying rent to your landlord, or anything else you so choose.

[00:14:34] The actual number in your bank account or on your payslip is irrelevant; the only thing that matters is what you can do with it.

[00:14:43] The deal that we all implicitly make is that we trust that our money won’t lose its value too quickly, and for that to happen, the government needs to keep a very close eye on inflation.

[00:14:57] One of the main roles of government is to control inflation, precisely so that it remains at a steady rate, and people can trust what their money will be worth in the future.

[00:15:08] Controlling inflation means political stability.

[00:15:12] If it’s too high, well it runs the risk of running out of control and becoming hyperinflation, as was the case in places such as Weimar Germany, Zimbabwe and Venezuela. 

[00:15:24] In all of these countries the currency became worthless, the state essentially collapsed, and in the case of Weimar Germany it cleared a path for the rise of Hitler and the Nazi party.

[00:15:38] Indeed, the country in Europe that is probably most afraid of high inflation is Germany, given that it experienced firsthand what high inflation rates can lead to.

[00:15:50] But, what if there were no inflation? 

[00:15:53] What if there were a way to stop this happening, and to stop prices rising?

[00:15:59] Well, there sort of is. 

[00:16:01] The opposite of inflation is called deflation, and it’s like inflation but in reverse. Every year things get a little bit cheaper. 

[00:16:10] Every year wages tend to reduce

[00:16:13] And if you are thinking that this is just theoretical, it’s not. 

[00:16:18] Japan has been undergoing a period of deflation on and off since the 1990s, and has struggled to get out of it. 

[00:16:27] It isn’t quite so tragic as hyperinflation, but once deflation starts, it’s very hard to turn it around.

[00:16:35] In a country with deflation, your money becomes more and more valuable over time, which means there is less of an incentive to spend or invest, so the economy doesn’t grow as fast. 

[00:16:48] And that is exactly what Japan has been suffering from. 

[00:16:51] Its economy has been almost flat over the past 30 years while the US economy, for example, has tripled in size.

[00:17:02] Now, I want to finish this exploration into the word of inflation with a brief discussion of the relationship between bitcoin and inflation. 

[00:17:12] Episode 122 from a few months ago goes into this in much greater detail, so I’d recommend listening to that if you’re interested in exploring this area further.

[00:17:24] One of the main reasons believers in Bitcoin are so fanatical about it is that it doesn’t suffer from inflation. 

[00:17:31] There are a fixed number of bitcoins in existence, so, unlike dollars, pounds or Euros, you can’t add more bitcoin to the monetary system.

[00:17:42] One of the causes of inflation, as we learned about earlier with the Demand-Pull Effect, is due to there being more money in circulation so that prices go up.

[00:17:53] This can’t happen with bitcoin, because the quantity of bitcoin is fixed.

[00:17:58] Now, an important point to note is that, although the bitcoin price has increased significantly, this isn’t due to price inflation; in fact, you now need significantly fewer bitcoin to buy the same amount of things as a few years ago.

[00:18:15] 1 bitcoin 10 years ago might have bought you a slice of pizza. Now it will buy you a Porsche.

[00:18:22] OK, if you have got this far, congratulations, it’s been quite an economics-heavy episode, and I know there is quite a lot of jargon, of complex terminology in there.

[00:18:34] The reality is that inflation is still something that we don’t completely understand.

[00:18:40] Economics isn’t an exact science, and if you look at a chart, a graph of inflation over time, it jumps up and down seemingly randomly. 

[00:18:51] Economists and policymakers have ideas about how to control it, but really there are millions of different factors that influence it. 

[00:19:00] Economics is really a social science that tries to understand human behaviour.

[00:19:07] And we human beings are unreliable and unpredictable, and the world is an unstable place.

[00:19:15] The bargain that we all make is that we trust the government to keep inflation under control. Normally, governments manage this quite well. 

[00:19:24] But when they don’t, well you just need to look at Weimar Germany, Zimbabwe, or Venezuela to see what the consequences can be.

[00:19:34] OK then, that is it for today's episode on inflation.

[00:19:39] I hope it's been an interesting one, that you've learnt something new, and the next time you see that the price has gone up for your favourite chocolate bar, your favourite magazine, or your landlord, then perhaps this will give you an idea about some of the reasons why that might be.

[00:19:56] As always, I would love to know what you thought of this episode, especially if you have lived either in a country or through a period of high inflation. 

[00:20:06] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:20:16] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:20:21] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.



[END OF EPISODE]