Skip to main content
Loading Explore guides…
Inflation explained · Acedra
Home
Explore
Economics
Inflation explained
Sign in to save
Chat
If YouTube asks you to sign in, open the video on YouTube.
Watch on YouTube
Reload player
Transcript
43 segments
Copy
Hide video
0:00
Hey there! Have you ever noticed how prices keep going up? For example, back in the year 2000, a burger price was around $2. But today, in 2024, that same burger may cost nearly $6! And it’s not just food! Back in 2000, a movie ticket was around $5. Now, you could be paying more than $10 for watching movie in the same theater! So, what’s going on? Why do prices keep increasing? Why don’t they just stay the same? Are sellers raising prices together on purpose?
0:35
Actually, there’s one big reason for this. Inflation. You’ve probably heard this word before, but do you really know what it means? Why does inflation happen, and is it always a bad thing? In this video, we’re going to break down what inflation is and how it works. Section 1. What is inflation? Inflation is actually pretty simple. It’s when the prices of things go up over time, which also makes the value of money go down. That’s why things, like a burger
1:05
or anything else you buy, cost more now than they did a few years ago. When inflation happens, your money cannot buy as much as it used to. For example, in the 1970s the average price of a cup of coffee was only around $0.25. But now in 2024, if you want to buy a cup of coffee with those same $0.25, you’d probably just get an empty cup but with no coffee. So, the coffee prices are going up and the value of money is going down, making everything seem
1:38
more expensive. But why does this happen? Well, that’s what we’ll talk about next. Section 2. Why does inflation happen? Inflation can happen for different reasons, but we’ll talk about the most common ones. The first one is the demand-pull inflation. This happens when a lot of people want to buy something, but there isn’t enough of it. Let’s take corn as an example. Imagine people usually want to buy 10 tons of corn, and farmers produce
2:08
exactly 10 tons. Everything works fine. But then, a tornado destroys most of the corn crops, leaving only 3 tons available. The demand is still the same, but now there’s not enough corn to go around. So, people start competing to buy it, and the price goes up. Maybe a can of corn used to cost $2, but now it costs $3 because there’s not enough corn. So, when people are competing to buy the stuff, they’re pulling the price up. The second one is the cost-push inflation. This
2:43
happens when prices go up because it costs more to make things. Imagine a popcorn seller sells popcorn for $3. But the same tornado that destroyed the corn farm means the popcorn seller now has to pay more for corn. So, 1 bag of popcorn normally costs $1 of corn, $1 of other cost, and $1 profit, making the total price $3. But because of the tornado, the cost of corn goes up to $2, while other production costs stay the same. This means the
3:17
popcorn seller made no profit if he doesn’t raise the price. So, the popcorn seller has to raise the price of popcorn, maybe to $4, so he can still get $1 profit. This is cost-push inflation, when the cost of making stuff pushes the prices up. The third one is built-in inflation. This happens when rising prices make the cost of living go up, and workers ask for higher wages to keep up. For
3:47
example, let’s say a shoe company workers’ average cost of living is $900 a month, and they earn $1,000 a month. They can cover their expenses and still have a bit left over. But if prices rise and their average cost of living jumps to $1,000, they won’t have any money left to save. In some cases, the cost of living can even rise higher than their salary. So, they ask their boss for a pay raise.
4:15
If the shoe company raises wages to $1,200, it helps the workers, but now the shoe company has higher costs of production, so they raise their shoe prices to maintain the profit. So, higher product costs lead to higher wages to cover living costs, which then lead to even higher product prices as companies try to keep their profits. And this becomes a cycle that keeps going. The fourth one is too much money in the economy. When there’s too much money in the economy,
4:48
prices can rise. Imagine a loaf of bread costs $5, and there are five people, each with $5. With only five loaves available, each person buys one. That’s great! But if the government gives everyone an extra $5, now each person has $10. With more money, people naturally want to buy more. Now, each person wants two loaves, but there are still only five. The bakery sees this and raises the
5:16
price to $10 because people are willing to pay more. In the end, each person still buys just one loaf, but now it costs $10. This isn’t because the bread is worth more, but because there’s more money around, it caused the value of money to decrease. This is like demand-pull inflation, which we just talked about. The bakery, which first makes more money, now faces higher costs too, as they compete with other bakeries for wheat. Wheat prices go up,
5:47
so the bakery has to raise bread prices again to keep up. This is like cost-push inflation, which we also just talked about. For real life example, Zimbabwe, Venezuela, and Weimar Germany had done that. For more on this, check out my video, “Why Can’t We Just Print More Money?” Link in the description! So, these are some main common factors and reasons that caused inflation. Now, you might ask, “How to know how high is the inflation?” Well,
6:15
that’s what we will talk in the section 3. Section 3. How is the inflation measured? You’ve probably heard people talk about the "inflation rate" which something governments mention often. And if inflation gets too high, it can hurt the economy. But how is this inflation rate measured? How do governments or institutions calculate it? There are different ways to measure inflation, but the most common way is by using something called the Consumer Price Index, or CPI. So,
6:45
what is the Consumer Price Index? It’s a way to track how the prices of everyday goods and services change over time. For example, in 2024, let’s say the price of bread is $3, milk is $4, eggs are $5, a candle is $8, and a movie ticket is $10. The total for all these items is $30. Then, in 2025, the price of bread rises to $3.30, milk to $4.20, eggs to $5.30, candle to $8.10, and movie ticket is still $10. The new total is around $30.90. Comparing 2024
7:28
to 2025, the prices have increased by 3%, so the CPI for that year is 3%. This means that, on average, prices have risen by 3% from 2024 to 2025. Of course, in reality, the CPI calculation is more complex and includes many more items, but this is a simple way to understand it. But here’s something important: a low CPI does not always mean prices are rising slowly. Why? As we see here, the prices for essential items that you need every day, like bread, milk, and eggs,
8:05
go up significantly, bread by 10%, milk by 5%, and eggs by 6%. Meanwhile, less essential items that you could live without, like candles, only increase by 1.25%, and movie tickets don’t go up at all. So, even if the CPI shows a small increase, people might still feel like things are getting expensive because the items they really need are the ones that are rising in price. The CPI is just an overall rough average, not a specific reflection of essential costs.
8:42
Section 4. Is inflation bad? If inflation makes things more expensive and lowers the value of money, shouldn’t we aim for 0% or even minus inflation to make everything cheaper? Well, that might seem logical, but in the long run, it’s not healthy for the economy. Let’s see the reasons. The first reason is that small inflation is good for growth. So, central banks usually aim for around 2% to 3% inflation per year. It’s like their magic number. Why? Because
9:14
small inflation encourages people to spend money rather than just save it. If people know that prices will slowly increase, they’re more likely to buy now rather than wait. When people spend, businesses grow, jobs are created, and the economy stays strong. Imagine if you’re trying to sell ice cream, but nobody wants to buy it, that’s obviously bad for business. The second reason is minus inflation is dangerous. If the inflation rate drops below
9:45
0 which mean minus inflation, it means prices are actually going down, and that’s called deflation. While deflation might sound good because things get cheaper, it also means companies may have to cut wages to maintain profits. This leads to a situation where everything is cheaper, but no one has enough money to buy anything. One example of this was the Great Depression in the U.S. during the 1930s, which was caused by massive deflation. So, while deflation might sound good,
10:19
it was actually behind one of the worst economic disasters in history. Well, I’ll explain more about deflation in the next video! I mean really the next video after this inflation video. I promise. The third reason is hyperinflation is a nightmare. If small inflation is good for growth, too low or minus inflation is bad, then too much inflation is also bad. If inflation gets out of control which is called hyperinflation,
10:47
prices can skyrocket very quickly. Hyperinflation is when average prices increase by more than 50% every month. Imagine in January 2025, price of a loaf of bread is $3, then at February the price already $4.5 well it’s just $1.5 increase. But if the inflation still goes until next year, in January 2026 the price is already $389 for the same bread! One famous case of hyperinflation happened in Venezuela, due to their crazy money printing, which make the
11:24
Venezuelan currency losing its value and causing prices to increase even every hour. Venezuelans even threw their money on the street because it was worthless and couldn’t buy anything, Section 5. How to control inflation? Since too much inflation is bad and minus inflation isn’t good either, how can we keep inflation stable? Well, both central bank and the government are responsible for controlling inflation. Yeah, they both do different
11:54
things. The central bank will take monetary policy while the government will take fiscal policy. So, what are their policies then? To control inflation, central banks like the Federal Reserve or the European Central Bank use monetary policy. Monetary policy is just a fancy term for the decisions they make to adjust interest rates and manage the money supply. Now, what kind of monetary policies does the central bank take?
12:21
The first one is adjusting interest rates. So, what is the interest rate? Interest rates are the cost of borrowing money in percentages. If you borrow $1,000 at a 10% interest rate, you have to pay back $1,000 plus an extra $100 as interest. So, when inflation is too low, the central bank will set the interest rates low to make it becomes cheaper to borrow money, leading more people to borrow money. When more people borrow money, it means people
12:53
have more money and people will spend more. This can push prices up and will increase the inflation rate like the demand-pull inflation. Now, when inflation gets too high, the central bank will raise interest rates. When rates go up, borrowing money becomes more expensive because people have to pay back more interest, which means fewer people borrow, people will have less money, and people will spend less. This helps bring inflation down. However, central banks cannot
13:24
keep interest rates too high for too long, because it makes borrowing harder, which means people can’t have money and nobody can buy or sell things which will slow down the economy. So, they need to carefully balance raising and lowering interest rates based on the country’s economic situation. The second one is controlling the money supply. Too much money in the economy will cause higher
13:49
inflation while too little money causes deflation. So, central banks also can control this through a method called open market operation. But how does open market operation work? So, when there’s too little money in the economy, the central bank will increase money supply in the economy by doing expansionary open market operation. This means the central bank will buy treasuries like government bonds from commercial banks. For example,
14:18
common banks that you use like Bank of America, HSBC, SBI, and more. These commercial banks mostly already owned government bonds and then they resell them to the central bank for higher price. The central bank buys with higher price to inject money into economy. As these banks will get more money from the central bank. This will lead for banks to lend more money to the people. As all
14:43
banks are competing to lend money, the banks will lower their interest rate to lure people to borrow money from them. This will lead to more money in economy so inflation rate can increase. But now, if the inflation rate is too high which mean too much money in the economy the central bank will do the opposite which is the contractionary open market operation. This means the central bank will resell treasuries like government bonds back to commercial banks. As banks buy
15:13
the government bonds from the central bank, it means commercial banks will have less money and will lend less money. As banks don’t want to lend too much money, they will raise the interest rate too. This results in less people borrowing money and less money in the economy which will bring down the inflation rate. So, in open market operation, buying and selling treasuries are the ways the central bank use to inject money into the economy or to retract money from the economy.
15:43
While, the central bank takes monetary policy, the government can take the fiscal policy to control inflation. Fiscal policy is also just a fancy term of decisions taken by the government like adjusting taxes and spending. So, here is some of their policies. The first one is adjusting taxes. Well, when people have too much money, people will spend more, and that will lead to demand-pull inflation. So, the government might raise taxes to reduce the
16:11
money you have for spending. In that case you will have less money and will lower your spending and then inflation will decrease. While contrary, if the money is too little in the economy or if the inflation is too low, the government will reduce taxes so you can keep more money and can spend and buy more things. Even though the government mostly will just raise taxes and they will very rarely ever decrease it. Yeah sad. The second one is adjusting government
16:42
spending. Imagine you own a store that sells construction materials like cement, bricks, and more. Your business is good as you have customers. Then, the government comes and buys tons of things from your store as the government wants to build a new bridge in your city. Well, the government not only buy things from your store, but also needs to hire engineers who will design and control the construction, the workers who will build the bridge, and more. So,
17:09
it means you as the owner of construction stores and these engineers and workers get more money from this bridge project. As you and other workers have more money, you will spend more money, and this will lead to higher inflation. But, what if the government stop doing that for a while. You won’t get orders from the government and these engineers and workers also are not getting paid.
17:31
So, you and other workers get less money and you will lower your spending. You might say one bridge can’t influence the whole economy. But remember! There’re tons of government’s projects across the country and involving thousands of construction store owners, thousands of engineers and hundred of thousands of workers across the country. The projects are also worth millions to even billions
17:55
of dollars. So, if the government lower their spending, it will impact a lot on money supply. Section 6. How to protect yourself from inflation? You might have heard your parents or grandparents say, "Save your money in a piggy bank." While saving is generally a good habit, inflation can make your money lose value over time. Let’s say you saved $1,000 in your piggy bank in 2014. In 2014, that $1,000 could buy a certain amount of goods. But by 2024, because of inflation,
18:29
that same $1,000 might not be worth as much as it did 10 years ago. So, how do you protect your money from losing value because of inflation? The answer is simple: investing. Many people suggest buying gold to protect against inflation. Since gold has a limited supply and high demand, especially as many people, including you, want gold, it becomes even more valuable when inflation rises. People trust gold to keep their wealth stable during inflation. However,
18:59
for some people, gold’s price doesn’t go up fast enough as stocks, so they prefer higher-yield investments like stocks, cryptocurrencies, real estate, or other investment tools. For example, if you invest in something, you want to pay attention to the return on investment or how much percentage your investment has increased. Let’s say in 2014 there’s 3 people named Bob, Jack, and Tony. Bob invested $1,000 in Apple Stocks, Jack invested $1,000 in gold,
19:30
while Tony saved the $1,000 in the saving account. In 2024 or 10 years later, Bob already made $9,000 with an average 25% return per year, Jack made about $1,800 with an average 6% return per year and Tony still the same $1,104 with an average 1% deposit interest per year. But don’t forget! We need to subtract the inflation rate from that return to know their real value of investment. If the inflation rate is 2% per year, then Bob’s actual return is about 23% per year which still
20:11
at $8,000 means he profits $7,000. While Jack actual return is about 4% per year which is still around $1,500 means he still profits around $500. While Tony’s actual return, after inflation, is -1% as saving account interest rate cannot beat the 2% inflation. So, Tony actual money is around $900, it means his money already lost $100 of its value. Wait hold on. You will ask what happened to
20:45
Tony? Well, as the average inflation rate is about 2% per year then $1,000 in 2014 is actually equal to around $1,200 in 2024. So even though Tony has $1,100, it can only buy what $900 could buy in 2014. So, it means, Tony’s money in regular saving account is losing 1% of its value every year. So, in conclusion. Inflation is actually a natural part of the economy, driven by various factors
21:19
from unexpected events, government or central bank policies, or even some theory that big companies are increasing prices for more profit. Since we couldn’t avoid inflation, understanding how inflation works and how to protect yourself from it, through smart investments and staying aware of how your money is growing can help you stay ahead. And if you want to invest your money to beat inflation, make sure to learn as much as you can! Don’t invest or throw your money into something
21:48
you don’t know and understand! And as promised, the next video will be about deflation. If you want me to make other videos explaining these topics, please like and subscribe. Thanks for watching.
Here to help you learn
Sign in to keep a private conversation with your course tutor.
Ask me anything about the material…
Sign in to chat