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Inflation Explained
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0:00
Inflation is out of control. Prices are exploding, your paycheck buys less every month, and everyone’s pointing fingers. But what’s actually going on? And how does it really affect you? It’s one of those things everyone talks about but few actually understand. On today’s episode of The Infographics Show, we’re breaking down inflation so that even a 5 year old could understand it. Most people find any talk of economics eye-wateringly boring. But it shapes
0:26
our lives every single day - whether we want it to or not. Take inflation. When prices surged worldwide during the pandemic, voters everywhere felt it in their wallets - and they took their anger out at the ballot box, kicking out governments left and right. Rising costs sparked massive frustration. Suddenly, everything people worked so hard to earn and save bought less - fewer goods,
0:47
fewer services, fewer of everything.. You don’t see inflation happening - but you feel it. At the grocery store, at the gas pump, and when your landlord drops by to tell you, you might need to sell that kidney to pay next year’s rent. So, what is inflation? An invisible force that makes your money worth less, year over year, and in extreme cases, day by day. Now, any negative economic indicator is a cause for concern. But inflation hits
1:12
more people than most other issues. Why? Because while economic problems like higher unemployment affect a few people a lot, inflation affects everyone. No matter how rich or poor you are, employed or unemployed, happy with your job or not… you can’t escape higher prices. Plus, it taps into what psychologists call “loss aversion”. Which means that people get much more annoyed about losses and bad things than they get happy about gains and good things.
1:40
So even when wages are keeping up with inflation, or even rising faster than the rise in prices. People will be more focused - and angered - by higher prices at the grocery store and gas pump. Even though the extra money in their pocket means they can afford it all as much as they always have. Though that’s not necessarily the case for a lot of people today, as we’ll soon see. Inflation makes consumers feel powerless. For example, to deal with unemployment,
2:05
you can theoretically work harder, or try more solutions to find a new job. Even if it doesn’t result in much. But you can’t do anything about higher prices. Except, perhaps, move to another country… or you know, turn to crime. Definitely don’t do that. Maybe understanding how and why inflation happens is a small step towards removing this feeling of “powerlessness” during times of inflation. At the very least, it will make it seem less random. So let’s start with the basics…
2:32
Inflation is a result of too much money, chasing too few goods and services. To really understand it, you have to think of money as a good too - one that also has supply and demand. When demand is higher than supply, the value of money rises, and each dollar buys more. But when there’s more money than demand, its value falls. That means you need more money to buy the same goods and services. Unless,
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of course, there’s suddenly a surge of new goods and services to balance things out. Basically, if you, Mark, and Priya are the only three people in the world and each have $100, you can all buy the same stuff. If you get another $100 as a bonus, you can now buy twice as much - at the one lonely store in this weird apocalyptic world clearly run by AI robots. But if all of you get an extra $100, the store’s going to raise its prices - instead of letting
3:23
everyone rush in and buy the whole place out overnight. That’s partly because there’s now more money chasing the same goods - so the store can charge extra. And partly because, in this tiny economy, you all probably work at that same store and got the extra money as higher pay. You're paid more because prices went up… or the prices went up because you’re paid more. It can be a real chicken and the egg thing. But it’s a cycle that leads to prices going up.
3:48
All this happens because the money in almost every country in the world today is what’s called a “fiat currency”. That means there’s nothing real backing it - like gold. It has value only because society agrees it has value. Like diamonds, or Labubus. But what causes the supply of money to rise faster than the demand for it? To understand the causes, it helps to look at a real-life example. And to understand that the government
4:13
actually wants inflation to exist. Let’s start with one that most people will have experienced pretty recently. The huge surge in prices - inflation - that happened because of the pandemic in 2020. Which has been widely misunderstood. Inflation didn’t happen right after lockdowns started. Inflation actually went down in the beginning. It really started going up with widespread vaccinations starting in March 2021. And no,
4:37
it wasn’t caused by the vaccines - you can take the tinfoil hat off. Pandemic inflation was like an economics crash course - supply shocks, spending booms, rate cuts - every possible cause of inflation showed up all at once. When COVID hit countries around the world, many reacted by temporarily going into lockdown mode. That reduced business activity by a lot. First, because some people were figuring
5:01
out how to work remotely for the first time ever. While dealing with the distraction of kids and “Love is Blind” playing on their TVs. Second, because workers and businesses that relied on in-person interaction - from factories to bars - simply couldn’t operate at all. Supply chains broke down as a result. Worker shortages, production delays, shipping delays… it was all a mess. You would order something from Amazon Monday and get it next
5:25
February. But you also had a great excuse every time you forgot to get someone a birthday gift. This is called “cost-push inflation”. And it didn’t hit every good in the same way. One of the worst hit was energy. Moving everyone home and shutting down offices, schools, and other buildings, as well as flights, unsurprisingly decreased energy usage across the board. A surge in TikTok use wasn’t enough to offset it. In April 2020, just a month after lockdowns
5:52
started in most places, electricity consumption declined by 7.6% around the world. By the end of the year, overall energy consumption was down about 5.3%. And when people eventually left their homes, activity revved up fast. In 2021, global energy consumption went up by 5.8%, higher than pre-pandemic levels. The problem is that energy companies had cut back output because of the huge drop in use the year before. So this big increase in energy demand wasn’t followed by a big
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increase in energy supply. It didn’t help that global transport was broken down already. And it’s not easy for energy industries to just increase their output overnight. Then the Russian invasion of Ukraine happened and energy prices skyrocketed. In 2022, crude oil went from $70 a barrel to $120 a barrel, almost overnight - a 71% increase. Instability in one of the world’s biggest oil and gas regions made everyone nervous about future supply.
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In 2021, just before the invasion, Russia supplied 14% of the world’s oil and was the largest exporter of natural gas. So this war, coupled with a sudden spike in energy demand, caused one big price hike. But what caused everything else? “Demand-pull inflation” played a big role. And for the non-economists here - that’s all of us - let’s explain. Many people ended up either laid off or underworking during lockdowns. The Bureau of Labor Statistics says
7:21
that 23 million people in the U.S. lost jobs at the beginning of the pandemic. That means at the very start, people were less inclined to spend their money than ever. Being unemployed and depressed has that effect. Plus, having zero social life outside of Zoom and nothing to do outside the house really increased the average person’s savings. The Fed estimates that U.S. households racked up $2.3 trillion in savings from the beginning of 2020 through the summer of 2021.
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In the meantime, to keep everyone afloat - especially those who had lost work or business - governments around the world passed laws to give their people money and financial breaks. In the U.S., this was the CARES Act. A $2.2 trillion injection into the economy. People got checks mailed directly to them and better unemployment benefits. Businesses got loans and grants. Renters got to defer their payments. What did this mean for the economy when it opened back up?
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People were sitting on saved up money. And they started going wild spending all that extra cash. And a lot of money moving around the economy causes inflation. And that’s with the same number of goods and services available. But the pandemic caused a double shock. Not only was there what’s called a demand shock - people had a lot of cash in their hands and a good environment to spend it in, interest rate-wise - there was also the negative
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supply shock we covered. So they had a lot more money… and a lot less readily available goods. And we’re about to get to the perfect storm of causes of inflation. Because banks also played a part - in the form of rate cuts. The Fed - like many central banks around the world - lowered interest rates to almost zero. Something they do to keep the economy going when things aren’t doing so well. At the start of 2020, interest rates were a little above 1.5%. Then, as the pandemic hit,
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the Fed slashed them twice in two weeks - down to almost zero - and kept them there for the next two years. So loans and mortgages were easier to get than they had been in years. In January 2021, mortgage rates reached historic lows of 2.65%. The rates for credit card payments drastically decreased as well. Student loan interest rates were set to zero for a period of a few years. So now there was a lot more money. Way fewer goods. And borrowing became so easy overnight.
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Inflation was about to go crazy. That’s the technical economic term for it, we’re sure. In 2021, December-to-December inflation was 7%. Average inflation in 2022 reached 8%. The highest month of inflation? 9.1% in June. Since the goal of most central banks is to keep inflation around 2% - yes, “ideal inflation” exists and we’ll soon explain why - these numbers were way over ideal.
10:05
Rates this high hadn’t been seen since 1981, back when repeated oil shocks sent prices soaring. From 2020 to 2025, prices in the U.S. jumped about 25% - more than double the increase of the five years before the pandemic, and more than twice what they’d risen in the five years before that. So why do governments allow this to happen? Why inject so much money into the country when they know it’s probably going to make prices higher? And why cut rates?
10:33
Unfortunately, when the economy slows down, that’s one of the few ways to get things moving again - and to keep struggling families afloat. Inflation just happens to be the side effect. When governments don’t follow these kinds of policies - as they couldn’t back when money was tied to the gold standard 0 the results can be disastrous. The Great Depression is a perfect example - mass poverty, mass unemployment, and an economy that simply ground to a halt.
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So while it’s easy to blame the government for inflation, it’s often a necessary evil. Because it’s part of how our economy was designed to work. Of course, since the government has the means to incentivize more market activity; it also has the means to try to bring inflation down. But as with anything in economics, these methods also have unintended side effects. The processes used to bring prices down - or at least stop them from skyrocketing
11:21
so much - can be financially painful. One way governments fight inflation is by raising interest rates. Higher rates slow the flow of money through the economy - borrowing gets harder, spending drops, and prices start to cool. But when rates go up, so do credit card payments, mortgages, and basically anything that involves a loan. At least inflation comes down. So while your grocery prices might end up more reasonable. Your dream of buying a home might
11:46
have to be put off for a couple more years. Of course, if you’re a millennial or Gen Z, that dream died the first time you saw your salary and your rent side by side. The thing is, you also don’t want inflation to go down to zero. A little inflation isn’t bad; it’s actually what keeps the economy going. It’s not the government being sneaky and mean to its citizens. It's a necessary part of a market economy. Why?
12:08
When consumers know that their money is going to be worth a little less next year, they’re more inclined to spend it today. This keeps companies and businesses alive, and money flowing around the economy. In that way, inflation is a function of a capitalist system. This is called built-in inflation. Wages go up, companies need to charge more for their products to pay their employees, employees demand more money to pay for goods, and so on. As long
12:32
as it’s kept to a reasonable degree. It’s been a key aspect of economies for most of modern history. That's why $1 in 1960 is worth almost $11 today, in 2025. The goal is to keep wages rising by as much, or even a little more than inflation, at the same time. Something that unfortunately hasn’t been happening in modern history. While the federal minimum wage was $1 per hour in 1960. Today it’s…$7.25 per hour.
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Which is why your parents can fondly tell you stories of buying their first house for $10,000 on a store manager’s salary. And putting themselves through college by working part-time at a bakery, or whatever hilariously out-of-reach financial situation they lived in back then. Now, wages increasing faster than inflation is what didn’t happen during the immediate post-pandemic era. Which is why people were getting very angry.
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In March 2021, most people were still working from home under social distancing rules. Wages were up about 7% from the year before, while inflation sat at just 2.6%. For once, income was actually growing faster than prices. People were also getting vaccinated en masse. Over 80% of at-risk people had received vaccines, which made most people feel more comfortable socializing. And by the end of March, 30% had received at least one dose, a number that was quickly rising.
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People were out and about… and prices were about to spiral. So just one month later, in April 2021, we saw the wage/inflation reversal happen immediately. Suddenly, wages were only 3% higher than the year before, while inflation was 4.3% higher. By May, the increase in wages had gone down to 2.9%, while inflation had reached 5%. And on and on it went, with inflation getting worse and worse while wages suddenly stagnated. It wasn’t just the presence of inflation then,
14:23
that angered people. It was inflation outpacing wage growth. By a lot. This trend finally reversed in June 2023. Thanks to intense government intervention and rate hikes. As well as the correction of international supply chains and a return to more “normal”, pre-COVID spending patterns. But government and central bank policies played a huge role in cooling the economy down. That’s one reason countries like the U.S. abandoned the gold
14:48
standard - to stop limiting how much money could exist to the value of a lump of shiny metal. If you can’t change the amount of money that exists in the economy, you can’t manage the highs and lows of a normal market economy. And this causes things like the Great Depression. It also means everyone’s money will be worth much more the longer they keep it sitting around. It might sound great in theory - I can stash my paycheck under a mattress and
15:12
buy a car with it in a few years? Sign me up! But it’s terrible for the economy. If everyone’s hiding their money instead of spending it, businesses can’t grow, jobs don’t get created, and the whole system grinds to a halt. One country that’s been experiencing not just a lack of inflation…but actual deflation for decades is Japan. In the early 1990s, Japan’s stock market crashed. Its land and other asset prices also plummeted.
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As a result, companies and citizens started holding off on spending. It made more sense to repay debt, not spend too much, and unfortunately for businesses, not invest too much either. Economists called it a “balance sheet recession”. The lack of wage increases, coupled with a rapidly aging population, also contributed to a general decrease in economic activity. Prices kept falling. And it resulted in a cycle where businesses and workers continued to hold off on purchases,
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assuming prices would keep falling. Which…they did. For 15 years, Japan averaged -0.3% inflation. Deflation lasted on and off for three decades. Things seem to be turning around as of 2022, and the economy is growing again. But it remains an example of why no inflation is bad. So 2% inflation is considered ideal. It keeps people spending, while still keeping overall inflation under the average wage increase – which
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averages between 2 to 5% in the U.S. From 2023 to 2024, for example, wages and salaries increased 3.7% year over year in the U.S. Too much inflation makes people angry. It’s frustrating to work just as hard - maybe even harder - than last year, and still feel like you can provide less and less for yourself and your family. If inflation goes too far in the other direction, it’s called hyperinflation. Which is
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when inflation surpasses 50% a year. And it makes money effectively worthless. Two of the best - or worst - examples in history to understand how and why this happens are Hungary and Zimbabwe. Post-World War II, Hungary’s infrastructure was destroyed. Its industrial capacity was a shell of its former self. On top of that, it needed to pay both reparations and the occupying Soviet army. The government was in a tight spot. Supply shocks - because
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factories had been turned into rubble - had already made inflation bad. Normally, a government would try to reduce the money supply to reign inflation in. Instead, Hungary’s government flooded money into the system through the banks. While this might seem crazy from a general economic perspective, the country needed some way to jumpstart a ruined economy. And what happened? Economic activity did pick up. Hungary started furiously building up its industrial capacity.
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And by July 1946, inflation reached 41.9 quadrillion percent. There is no comparison we could make that would make this number comprehensible. At one point, prices were doubling every 15 hours. People had to rush to the store as soon as they got money in their pocket, otherwise they might not be able to afford bread a few hours later. Every supermarket looked like an Apple store the morning of a new iPhone launch.
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Citizens’ savings were completely wiped out. Wages lost over 80% of their value. Pensions became worthless. Creditors were destroyed. Daily life completely changed. Restaurants threw out menus because it was pointless to list prices. People walked around with wheelbarrows of cash to do their supermarket shopping. Many people abandoned the Hungary currency - the pengo, at the time - all together. Instead, they chose to trade goods with friends, neighbors, and shopkeepers.
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That’s the result of hyperinflation. The value everyone agrees a currency has disappears. So money starts to mean almost nothing at all. At one point, the government printed out a sextillion pengo bank note. Meaning a billion trillion bank note. Might as well just use Monopoly money at that point. Hungary had built its economy back up… but at what expense? In the summer of 1946, inflation was so out of control that it was clear the government
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had to do something drastic. They decided to introduce a whole new currency to replace the old one. The forint, instead of the old pengo - which was now worth less than toilet paper. Zimbabwe’s hyperinflation crisis in 2008-2009 had such a huge effect that it has become a cashless society - at least when it comes to Zimbabwe’s local dollar. The country’s crisis was caused by literally all the problems. Political corruption resulted in
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a lot of stolen money from government reserves. Bad political decisions and financial decisions killed food productivity in Zimbabwe and put residents at risk of starvation. Sanctions by the US, IMF, and European Union caused the banking sector to collapse. Zimbabwe also had to fund its military campaign in the Democratic Republic of Congo. It also had to import food to keep people from starving - the country’s food production collapsed by about 60% between 2000 and 2008.
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So what did it do? Led by dictator Robert Mugabe, the government started printing money. Lots of money. It had already printed around Z$21 trillion to pay off IMF loans. And now it was a printing machine. Inflation started spiraling. So badly that the government had to re-denominate money. Which meant that one day Zimbabwe announced Z$10 billion was now actually Z$1. It was an attempt to not only slow down inflation;
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but also make math easier. Who is trying to figure out the tip on a Z$948 million meal?! As you might’ve guessed, those moves didn’t help at all. Otherwise, this story would be about how inflation almost happened in Zimbabwe - but didn’t - and everything was great forever and ever after that. In July 2008, inflation in Zimbabwe reached 231 million percent. It left the Zimbabwean dollar with an exchange rate of Z$35 quadrillion to $1 US dollar.
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So the Zimbabwean dollar disappeared from the country altogether. Since by that time, it was basically paper with cool designs on it, and nothing more. Zimbabwe adopted foreign currency for every use. And not just one foreign currency. Multiple. US dollars were used in many places. But so were Chinese yuans and Indian rupees. The problem? The Zimbabwean economy was much weaker than the currency it was using. So producing things inside Zimbabwe became very expensive.
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Businesses had to shift strategies and import almost everything. That meant it had to keep paying this cash out…and wasn’t receiving much in return. Eventually, the nation ran out of the foreign currencies too. Today, most people use mobile money or card-based transactions to conduct business. And not just because it’s more convenient. Because there isn’t that much physical cash to go around. This might not sound that bad - hey, most people under 40 never have more than $20 on us,
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if that. But it might sound worse if you’re one of the Zimbabwean professionals sleeping outside banks overnight to be first in line to withdraw money from your own savings account. Banks just don’t have the cash on hand. So you get in first…or you don’t get anything at all. They had to reduce the amounts people could withdraw per day from $2,000 to just $100. One BBC report on this phenomenon saw 165 people receive money at a
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particular bank branch, of the hundreds who tried to get it. They got $50 each. In other words, inflation needs to exist for an economy to grow. It just can’t be too high or too low. Governments and banks need to find that sweet spot - the Goldilocks spot - to keep inflation just right. Now you know what inflation is but what happens if it spins completely out of control? Watch What If The US Economy CRASHES to find out. Or click on this video instead.
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