WEBVTT

00:00:00.120 --> 00:00:06.040
One of the oddest things about economic life is that the prices for things keeps rising?

00:00:06.040 --> 00:00:12.599
Incomes and prices in the past were amazingly different from what they are today [in] Pride and Prejudice, Mr.

00:00:12.599 --> 00:00:15.120
Darcy supposed to have [been] one of the richest people in britain

00:00:15.120 --> 00:00:20.410
It's 1813 and his income is 10,000 pounds a year today

00:00:20.410 --> 00:00:26.230
That's less [than] [half] of what a primary school teacher straight out of college would earn in sense and sensibility

00:00:26.230 --> 00:00:33.370
[there's] an argument about whether an income of 20 pounds a week is enough to make you well-off and the answer is yes

00:00:33.370 --> 00:00:38.700
It's there in living [memory] to a cinema ticket was 30 p in 1970 today

00:00:38.700 --> 00:00:45.460
It's 13 pounds, so what does inflation happen and should we worry if it does?

00:00:45.460 --> 00:00:49.059
Government's track inflation, obsessively and try to keep it low

00:00:49.059 --> 00:00:56.140
there's a vast amount of [data] collected all the time to ensure [that] governments can say with amazing precision how the

00:00:56.140 --> 00:00:57.550
Inflation rate is going

00:00:57.550 --> 00:01:00.520
is it on track for two point three percent per annum [or]

00:01:00.520 --> 00:01:05.199
Might the increase of low point three eight percent in February be a cause for alarm

00:01:05.199 --> 00:01:09.700
This is in big historical terms a relatively new concern

00:01:09.700 --> 00:01:16.840
In the 17th century the Spanish Empire essentially collapsed from inflation without even realizing it was occurring

00:01:16.840 --> 00:01:23.439
So over time societies have become obsessed with measuring [inflation] and very focused on managing it

00:01:23.439 --> 00:01:29.140
So why is there inflation? What makes it happen there are basically three reasons?

00:01:29.140 --> 00:01:32.020
The first is what economists call

00:01:32.020 --> 00:01:33.579
cost-Push inflation

00:01:33.579 --> 00:01:37.930
This is where the costs to businesses rise and are then passed on [to] customers

00:01:37.930 --> 00:01:41.939
There can be a lot of reasons for these rises firstly raw materials

00:01:41.939 --> 00:01:48.820
Especially oil might get more expensive for a very nice reason because a lot of countries are developing and doing well

00:01:48.820 --> 00:01:51.759
secondly workers might be asking [for] more money and

00:01:51.759 --> 00:02:00.579
Succeeding either because they've organized themselves well politically or because schools and colleges haven't been training enough workers in the skills that companies need

00:02:00.579 --> 00:02:07.299
Thirdly land rents might be increasing because not enough factories and offices have been built which tends to come down to political

00:02:07.299 --> 00:02:15.410
Failures around building permits the result of all this is that businesses then push their extra on to the consumer by raising prices

00:02:15.410 --> 00:02:21.260
They don't want to it's a scary move but they have no choice. They'd go out of business otherwise

00:02:21.260 --> 00:02:24.980
The second kind of inflation is called demand inflation

00:02:24.980 --> 00:02:29.900
This is when there are increases in the number of people who want something whose supply can't keep up

00:02:29.900 --> 00:02:37.160
The most common cause of demand inflation is an otherwise rather nice thing that people are getting richer and have more money to spend

00:02:37.160 --> 00:02:44.570
That's why government can cause inflation by lowering taxes everyone loves tax breaks because they raise disposable income

00:02:44.570 --> 00:02:53.060
But in the longer term raising demand can also cause price rises thereby negating some of the initial boost of the tax break

00:02:53.060 --> 00:02:58.850
similarly a fallen interest rates may cause short-term pleasure and long-term inflationary pressure if

00:02:58.850 --> 00:03:04.150
Interest rates on loans or mortgages fall we might be tempted to take out a loan [to] buy the new car

00:03:04.150 --> 00:03:09.040
We've always wanted but the car company sensing solid demand will soon enough

00:03:09.040 --> 00:03:15.400
Jack up the price if banks and governments inject more cash and credit into the economy people have more money to spend

00:03:15.400 --> 00:03:21.710
But if they're all chasing the same number of goods as before [it] just means they can all offer more for the same

00:03:21.710 --> 00:03:25.190
This is what happened around housing in the uk particularly in London

00:03:25.190 --> 00:03:31.730
They were broadly the same number of houses there were 25 years ago, but they all costs an absurd amount more

00:03:31.730 --> 00:03:36.500
The third classic cause of inflation is government's printing money

00:03:36.500 --> 00:03:41.150
There's a deep logic behind this idea which can at [first] sound almost criminal

00:03:41.150 --> 00:03:44.410
Governments often want to stimulate the economy to create more jobs

00:03:44.410 --> 00:03:50.360
So they print more money this can be done literally by increasing the number of notes in circulation

00:03:50.360 --> 00:03:53.080
Or they can do it by increasing government

00:03:53.080 --> 00:04:00.110
Debt or by letting banks make bigger loans on the same security in all these cases the amount of money in circulation

00:04:00.110 --> 00:04:07.900
Increases, but there's a big problem because after a while it means the worth of every note starts to fall because more notes are

00:04:07.900 --> 00:04:15.950
Chasing the same number [of] things to buy. There's more money about but it doesn't buy you more it just pushes up prices

00:04:15.950 --> 00:04:21.859
However, there is a possibility here spotted by the economists and [Philosopher] John Maynard Keynes

00:04:21.859 --> 00:04:26.270
It takes time for the value of money to fall so for a little while

00:04:26.270 --> 00:04:31.740
There can [be] more cash around and prices haven't yet risen this is a window of opportunity

00:04:31.740 --> 00:04:34.949
[that] economies can with a lot of luck [cease]

00:04:34.949 --> 00:04:39.150
At such Goldilocks moments people can actually increase their consumption

00:04:39.150 --> 00:04:45.030
Firms can afford to hire more workers and buy new machinery and once they've done that production will increase

00:04:45.030 --> 00:04:49.110
There will be more stuff to buy before inflation is eaten up the [gain]

00:04:49.110 --> 00:04:53.969
So there's a real expansion a bit of inflation can grow the economy

00:04:53.969 --> 00:04:56.610
That's a big but contested idea

00:04:56.610 --> 00:05:03.419
The argument is that it doesn't matter if prices are going up [ten] percent every year [if] wages are going up 15 percent

00:05:03.419 --> 00:05:08.280
So deliberate government-led inflation can be a mechanism for growing the [economy]

00:05:08.280 --> 00:05:15.590
But it's a very risky move which is often backfired and been attacked by the great enemies of the Keynes ian's economists people

00:05:15.590 --> 00:05:16.680
we now know as the

00:05:16.680 --> 00:05:23.669
Monetarists who believe that anything which increases inflation is always going to [be] an issue and must be avoided at all costs

00:05:23.669 --> 00:05:25.440
whatever the short-term

00:05:25.440 --> 00:05:33.539
So why is inflation such a problem the real problem? Is that not everything inflates at exactly the same rate if

00:05:33.539 --> 00:05:39.180
Everything went up by hundred percent a year and so did everyone's income and it was all totally steady and predictable

00:05:39.180 --> 00:05:40.370
It would be weird

00:05:40.370 --> 00:05:47.099
But it wouldn't actually do any harm the harm comes from the fact that not everything changes at the same rate

00:05:47.099 --> 00:05:49.349
in 1941 in Hungary

00:05:49.349 --> 00:05:50.729
inflation reached

00:05:50.729 --> 00:05:57.449
[150,000] percent each day a jelly bean that [cost] 10 p on Monday morning would therefore cost the equivalent of

00:05:57.449 --> 00:06:00.690
150 pounds on Tuesday morning, and

00:06:00.690 --> 00:06:04.879
225,000 pounds on Wednesday morning, that's incredibly complicated

00:06:04.879 --> 00:06:09.360
But it's a problem [only] [because] other things would not be increasing as fast

00:06:09.360 --> 00:06:14.279
If you kept your life savings under the mattress you'd be wiped out in a day [or] two

00:06:14.279 --> 00:06:18.839
The money that could have bought you a house on Monday would get you a jelly bean on Wednesday

00:06:18.839 --> 00:06:23.909
This is the Ultra Extreme case, but it illustrates a basic point

00:06:23.909 --> 00:06:26.879
Inflation is bad for savings

00:06:26.879 --> 00:06:34.480
There's no point in putting money aside, and that's a pity because saving money the attitude of saving up for things before you buy them

00:06:34.480 --> 00:06:35.810
Is an admirable?

00:06:35.810 --> 00:06:36.860
characteristic

00:06:36.860 --> 00:06:39.640
keeping inflation Low rewards prudence

00:06:39.640 --> 00:06:48.170
It helps long-term planning because you can know what your money will be worth in the future and this rewards taking care around costs

00:06:48.170 --> 00:06:54.170
Ultimately what inflation reflects is the instability of the world and of life itself?

00:06:54.170 --> 00:06:59.660
Prices rise because we can't yet keep the complex system known as the economy under control

00:06:59.660 --> 00:07:04.190
There's always something going wrong or growing or falling or failing somewhere

00:07:04.190 --> 00:07:10.790
Ideally would keep inflation under control with a more or less fixed amount of money chasing a more or less stable amount of Goods

00:07:10.790 --> 00:07:18.140
But in reality [low] inflation is extremely difficult to achieve because so many factors can derail it

00:07:18.140 --> 00:07:21.590
cost of Materials cost of [Labour] productivity

00:07:21.590 --> 00:07:29.180
Taxes falling or rising exchange rates again falling or rising a growing domestic economy a neighboring economy. That's growing

00:07:29.180 --> 00:07:35.150
Falling interest rates the buying of government bonds or the printing of money in the end we may have to accept that?

00:07:35.150 --> 00:07:41.890
Inflation is a bit like the weather or our own moods something that's inherently rather unstable something whose ups and downs

00:07:41.890 --> 00:07:48.610
We must endure even as we try to mitigate the extremes learning to live with inflation belongs to wisdom