eight thousand years ago mesopotamia tribes were the first to utilize a bartering system to get the food weapons and spices they needed these ancient people realized they could use their time to create value for others in return they exchange this value for other goods and services this idea has merged into the advancement of the human species today that same process is still intact it's called the economy time drives the economy each person has a clock and a unique way they provide value to others people can store value currencies or assets can hold the value of one's past long into the future storing value allows people to think long term perhaps someone wants to save up for a house take a vacation or start a company inflation is a hidden tax on time when a person uses a specific currency that a government devalues their past time devalues as well that dream house vacation spot or new product inventory rose in price compared to the currency they store their wealth in understanding inflation is vital for every individual who wants to protect their time inflation is a continual rise in the price of goods and services if the number of currency units in the system rises far more than the supply of goods and services in the economy prices will increase this definition leaves unanswered questions such as what can cause inflation how do we measure inflation and what does inflation affect let's begin by examining three types of inflation monetary inflation refers to a rise in the broad money supply in other words it's not about prices rising it's about the amount of money in the financial system increasing broad money supply consists of all bank deposits for both individuals and businesses and physical currency in circulation this chart shows the us broad money supply over time two main forces drives the broad money supply banks process private loans and create new deposits or the government issues bonds which is essentially debt the central bank prints money to buy large portions of this government debt consumer price inflation occurs when the price of goods and services climb the consumer price index also known as cpi measures these prices disagreement arises when deciding on what goods and services should be in cpi's measurements if household a has different spending habits than a wealthier household b what products and services should be calculated into a formula that reflects the majority this consumer price index chart shows a basket of goods that cost twenty two dollars in 1947 a hundred dollars in 1982 and 265 dollars today the price of a basket of goods has risen over 12 times in the past 74 years asset inflation refers to the valuations of financial assets like stocks real estate or gold increasing over time here's u.s household net worth and short-term interest rates household net worth includes stocks bonds cash real estate and other assets minus liabilities asset inflation often happens during periods of high wealth concentration and low interest rates if the central bank were to create a trillion new dollars and give the hundred wealthiest people in the country an extra 10 billion dollars each what would they spend it on the rich have already fulfilled their physical needs and desires so they'll buy more financial assets if the government and central bank were to distribute five thousand dollars to every low-income american a significant portion of them would purchase more everyday goods now let's understand how the supply of money impacts cpi over the long run technology should continually improve and push prices lower however money creation processes and other policy choices can create inflationary results that offset technological price reductions broad money growth is one of the most closely correlated variables to consumer price inflation let's examine the data of three different countries this chart shows the united states money supply and consumer price index are closely related however there are some notable periods where the connection is not as close for the first exception period the united states experienced a technological revolution the age of steel electricity and heavy engineering allowed for tremendous growth while mass immigration brought cheap labor to emerging markets land in the west became a mecca of opportunity stories of riches made of oil and gold spread like wildfire the transcontinental railroad connected east to west soon after the light bulb was commercialized leading to the mass adoption of electricity the banking system grew as a share of gdp from tiny to significant connecting more financial capital to innovative people and industries during this time the dollar was backed by gold as well from the 1990s to present times the united states came across another technological revolution through the age of information and telecommunications the exponential increase in computer power and networking allowed the digitization of many processes corporations outsourced domestic labor to cheaper places like mexico and china which placed downward pressure on domestic wages and prices automation displaced a portion of work and drove wages and prices down further in the previous example the united states experienced a rise of a superpower backed by innovation new land and resources in contrast the united kingdom experienced the gradual decline of a superpower and the loss of the global reserve currency their broad money supply per capita and price inflation remained correlated as a final example australia experienced a strong correlation until the rise of china as a trading partner increased trade gave australia an economic boost allowing their money supply to grow faster than cpi many people believe cpi understates the actual inflation rate in the united states house prices food prices health care prices and tuition prices are all rising faster than cpi and they represent the bulk of middle class expenses on the other hand some people believe cpi has not fully captured the impacts of technological deflation so who's right consumers paying for things in the real world or academics with models and numbers in front of them this is the average american household expenditure housing transportation healthcare and education collectively a 60 of the spending while everything else combined is 40 according to the official metric the median house price healthcare cpi and education and child care cpi rose faster than broad cpi if 60 of the expenditure basket increase is higher than the overall inflation rate does that outweigh the remaining 40 percent one conflict of consumer price inflation involves the calculation of housing costs housing is one of the most significant expenses for consumers and calculating costs plays a huge role in cpi's accuracy cpi excludes house prices since it is considered a capital asset a capital asset is an investment that earns income or capital gains cpi measures consumption assets which are goods and services that do not get resold instead of house prices the government uses owner's equivalent rent the calculation runs into a problem when deciding to include the interest rate in the home price when calculating its cost since the owner's equivalent rent looks at the monthly cost it indirectly considers interest rates one of the most notable price outliers was tuition with a 300 increase compared to 100 percent for the broad cpi from 1990 to 2020 as tuition has increased globalization offshoring automation and reduced union participation have resulted in considerable downward wage pressure on many jobs the typical worker's wage has fallen behind productivity growth while the cost of a degree has gone up twice the pace of broad cpi corporations in the top one percent benefit from lower wages while the typical person has to pay back more student debt with lower salaries the middle and working classes have been squeezed the share of u.s net worth held by the bottom 90 percent of the country decreased from about 40 percent to 30 percent from 1990 to 2020 the top 10 percent have increased their share from 60 percent of the wealth to 70 the top 1 alone holds slightly more household wealth than the bottom 90 combined based on the data cpi reflects an average of 2.5 yearly price inflation for the past three decades factoring out some questionable parts of the model a number around three percent is realistic however because the modern world requires more education and debt inflation feels like four percent annualized for many people the broad money supply rose at five percent per year during this time but mainly concentrated in the assets of the upper class you'll often hear that inflation is transitory many types of inflation occur rapidly and then suddenly cool off inflation that is transitory in absolute terms reflects prices temporarily increasing and then dropping back down when the supply shock is over on the other hand inflation that is transitory in rate of change terms describes prices that jump rapidly then slow but never return to original levels let's look at the inflationary 1940s the official year-over-year inflation rate shows three clear inflation spikes these spikes were transitory in rate of change terms prices increased then cooled off but never returned to their original levels inflation spiked because the broad money supply per capita soared in the 1940s once that money was created it remained in the system forever and prices reached permanently higher levels keep this in mind when told that inflation is transitory it's often transitory in rate of change terms but not absolute terms hyperinflation is defined as 50 month-over-month inflation if that persists and therefore compounds exponentially that would be well over ten thousand percent inflation by the end of the year after world war one the weimar republic mark hyper-inflated due to losing the war and paying foreign war reparations in 2016 the venezuela bolivar hyper-inflated from a collapse in oil prices and loose money printing policies for hyperinflation to occur there needs to be a widespread loss of faith in the currency with the economic structure in developed countries hyperinflation is unlikely in developing countries hyperinflation has a higher likelihood of occurring since direct access to starting capital is limited developing nations must rely on foreign financing these corporations or governments often no debts in currencies that they cannot print and default when failing to repay these obligations hyperinflation negatively affects everyone since the economy can't function properly with no reliable medium of exchange it isn't easy to offer products and services especially ones that require planning and investment however inflationary environments have winners and losers let's look back through history and run some numbers during both the 1940s and 1970s inflationary decades of the past century wealth concentration went down in the 1940s massive spending to industrialize the economy and fight world war ii led to inflated prices the new technologies used in the war were repurposed and pushed to domestic use to pay for this the government raised taxes on the wealthy and inflation ate away the purchasing power of bonds and cash disproportionately held by the rich in the 1970s there was a rapid increase in wages and bank lending along with financial fiscal deficits commodity shortages negatively affected poor and rich people alike financial assets like stocks and bonds performed very poorly while real estate with a mortgage thrived labor unions were near the height of their power which kept wages high for the bottom 90 percent until their power weakened in the 1980s let's fast forward to recent numbers based on data compiled by the federal reserve the top one percent of society currently has 31 percent of u.s household net worth in comparison the bottom 50 percent of society has 2 percent of net worth the average member of the top 1 percent has 770 times as much wealth as an average member of the bottom 50 percent more specifically the top 1 of households in the united states have 39.4 trillion dollars in assets and less than 800 billion dollars in debts which gives them a net worth of 38.6 trillion dollars meanwhile the bottom 50 percent of households have 7.6 trillion dollars in assets and 5.1 trillion dollars in debts resulting in 2.5 trillion dollars in net worth as a recap there are some main ideas when understanding inflation monetary inflation meaning a rapid increase in the broad money supply is driven by the rise in bank lending or large government debts whether this leads to asset price inflation consumer price inflation or neither depends on a few variables whenever the balance of power favors the wealthy due to combinations of offshoring automation and the political environment monetary inflation is likely to translate into asset price inflation whenever the balance of power shifts towards labor monetary inflation is likely to translate into consumer price inflation cpi should be questioned as it is hand-picked by the government and doesn't reflect unique spending habits the big loser asset classes in inflationary environments are cash loans bonds and any fixed income put simply owning the debts of others assures a negative return on the other hand inflation is beneficial for debtors as their debt will be easier to pay off as inflation rises when cash gets devalued a person's time gets devalued understanding the basics of inflation will help more people protect their most important asset time