A Discussion Regarding Inflation
There's an old Popeye cartoon (ask your parents about it!) where the mooching character J. Wellington Wimpy sits down at the counter of a diner and tells the cook that he would "gladly pay [him] Tuesday for a hamburger today." Is it a good idea for the cook to give Mr. Wimpy the hamburger today and wait until Tuesday to be paid? In order to answer this question, we have to understand inflation.
Inflation is a general, sustained upward movement of prices for goods and services in an economy. A "general" movement means some prices are rising—perhaps for food, cars and tickets for baseball games—while other prices—for flat screen televisions, blue tooth and cell phones are falling. If most prices are increasing or the increase in some prices is greater than the decrease in other prices, the average price level increases.
If prices generally rise over time, J. Wellington Wimpy is better off having his hamburger now and paying for it in the future. However, the cook could find that by the time Wimpy gets around to paying for the hamburger, the amount Wimpy pays won't be enough to buy the ingredients for another hamburger. If Wimpy actually pays on Tuesday, the longest the cook will have to wait for payment is six days. How much could prices change in just six days?
Luckily, the United States has never had an inflationary period where six days made a big difference in prices; however, some countries have had periods where prices doubled every few days, even every 24 hours!
Gasoline and Corn Flakes
What happened with the gasoline and corn flakes? As you can see, over the years, we get fewer items for the same amount of money—$5.00. Whether hamburgers, gasoline or corn flakes, the line of items slopes downward across time, showing how we get less and less for our money. How do you think the items would slant if we changed the graphic to illustrate the number of dollars it would take to purchase the same amount of items over the years? To find out, click the "Show Dollars for 10 Items" button below.