Since the evolution of the Federal Reserve, we of course see a great increase in terms of inflation of the money supply. With the increase of inflation, prices naturall rise due to the deluting of the purchasing power of the currency. However, I have been trying to mull over this idea for a few days. Inflation is increasing, I see that. However, how is it that prices themselves are decreasing in some areas of the market. Things like TV’s, computers etc.
Computers and TV’s are becoming increasingly cheaper to produce. The price goes down despite of inflation.
Prices always had a tendancy to decrease, as production techniques improved and the amount of effort required to produce things decreased.
For example, if my memory serves correctly, only around 3% of the US economy is currently concerned with agriculture. As recently as around 300 years ago, perhaps 80% of all of the people in the US would have concerned themselves with the production of food and this (proportionately) greater effort would have met their annual needs much less completely (both in quantity and quality).
If a farmer can spend 3 hours producing more food than he was previously able to produced in 80 hours then the cost of producing food is clearly decreasing. What previously cost the equivallent of 80 hours work now only costs 3 hours work… the same is true of a nation. When you walk into a store and you can buy a new car for the equivallent of 2 month’s salary, as opposed to a couple of years annual salaries (which is what cars used to cost) this is because cars are cheaper to produce.
So the Fed would be required to inject additional funds into the banking system even if all they wanted to do was to 0% price inflation - since they would need to counter the deflationary effects of increases in the productive output of the economy (due to technological and business process improvements). On aggregate, of course, they rarely settle for a mere 0% and seem to prefer something in the 4-7% range lately (they’re not very happy at present).
Still, inflation statistics like the CPI are just broad aggregates and obviously the improvements in the production techniques in some industries (notably the tech industry) oustrip those in other industires (such as oil and agriculture)… so the prices of computers and flat screen TVs can continue to fall even as other prices rise by 3-4%.
Imagine how cheap computers would be in the absence of monetary inflation?