Inflation has a technical, economic meaning, but the way we see it every day is that the price of things we buy and sell tends to go up. Believe it or not, this is actually normal, healthy, and just part of people being people and living their lives.

The economy, that big, shapeless, powerful beast that shambles around out there in the howling financial wilderness is actually just all our day to day decisions added up. A teenager has a little bit of spending money, and decides he can afford to buy an iPod. An employee at a call center knows that her friend got hired across town at another center for a dollar more an hour, so she asks for a raise. Her manager knows about the other call center too, and since she could get hired there tomorrow, he gives her the raise. Argentina and Kuwait agree to sell one million barrels of oil each for $50, but Argentina decides it can cheat, and sells one and a half million.

All of our opinions about what things are worth, and all the buying and selling choices we make based on these opinions add up to what things cost. Here is where the human element comes in. Since none of us have the time, patience or, frankly, the interest to know the petty details of how every one of our decisions will affect all the other people we are connected to economically (our boss, the folks who make our shoes, the grocery boy, Argentina), little imbalances get introduced into the economy. The woman at the call center is not working any harder, or taking any more calls, but now she has an extra $80 a month to spend. She buys a couple of nice pairs of slacks and some stock in a big oil company, and the people who make her slacks can charge a little bit more for the fall season new clothes, since they are selling so well, while the stock brokers see that the price of the oil stock keeps going up, so they get their clients to buy more. There's nothing wrong with any of the decisions all these people make, but every time some tiny part of the equation changes, everyone else has to adjust a little. Since nobody has the time or brain power to know about all the different things happening at once, imbalances build up.

Take power generation in California. The people of California just didn't know ten years ago that there would be all this trouble in the middle east, and that the natural gas they were using to generate a lot of power was going to be ten times as expensive today. It took a while to realize how much trouble was building in that region, and a while longer to realize how it would effect them generating power, and a while longer to decide that the trouble was likely to go on for years. Even once they figured it out, it takes a long time to get approval to build more wind farms or hydroelectric dams or nuclear power plants, and a long time to actually build them once they are approved. So the people of California have had to pay more and more for the natural gas from Saudi Arabia, while the government in Sacramento has had to convince the grocery boy and the call center lady that they should pay more tax money to build nuclear power plants and stop buying expensive natural gas. Nobody wanted power to get more expensive, from Saudi Arabia all the way to the grocery store. It just happened because everyone involved was a person who made the best decision they could with what they knew.

As long as people are not perfect, there will be little inefficient things that build up in the economy, and there will always be inflation.

Learn more about this author, David Thill.
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