Why does inflation even exist?

SneakySpectator

I've never really understood inflation, I mean I understand how it works I just don't understand why it exists. 

Let's just imagine everything has a price and every job as an income. Some people earn more than others but pay rises don't exist. 

So Apple creates an iphone and they sell it for £300. Then 3 years later they create a new one and sell it for £300. All the people that owned the previous iphone can spend £300 and buy the new one if they want, and people that can't afford the new £300 one can buy the older model which will be reduced in price by Apple to encourage people to spend £300 again and buy the newer model.

And this process repeats, for everything sold by every company. Like why can't we just take the global cost of creating stuff and consuming stuff and wages etc and just freeze it so it remains static? Why do things HAVE to increase in price over time? I mean is it some kind of human psychological unwritten law or something? 

OK so you're probably going to say something about supply and demand right? If everyone and their grandpa wants a new iphone, Apple can charge £350 instead of £300 and everyone will still buy it. But when every company does this, it just results in everything going up in a somewhat uniform amount. 

company a charges company b charges company c charges company d etc until the final cost is offloaded to the consumer. 

But why doesn't company just charge company b the same as before, who will then charge company b the same as before etc and so the consumer gets a new product for the same price? 

Voyager2002

Suppose you work as a skilled widget designer... one day you find out that company B needs someone with your skills, and would pay you 20 per cent more than your present salary. Would you not change jobs?

Of course, your present employer knows that this kind of thing happens, so unless they can easily replace you they are going to be forced to give regular pay rises in order to retain the staff that they need. And in order to pay for those increased salaries, and of course to give shareholders increased dividends, they need to review their prices and increase what they charge to what the market will bear.

SneakySpectator

Voyager2002 said:

Suppose you work as a skilled widget designer... one day you find out that company B needs someone with your skills, and would pay you 20 per cent more than your present salary. Would you not change jobs?

Of course, your present employer knows that this kind of thing happens, so unless they can easily replace you they are going to be forced to give regular pay rises in order to retain the staff that they need. And in order to pay for those increased salaries, and of course to give shareholders increased dividends, they need to review their prices and increase what they charge to what the market will bear.

Ah that's a good point, poaching the competition!

So where in the chain does inflation actually start? Is it even possible to determine? 

Newbie_John

What's inflation? The difference between prices of 100 items in "the basket" compared yearly.

And why prices go up? Every company wants to make money so they keep their product at highest possible price (but not too high so customers still buy it). And changes in the market - like recent change to electricity prices shifted everything up in costs as well passed to consumer.

SneakySpectator

Newbie_John said:

What's inflation? The difference between prices of 100 items in "the basket" compared yearly.

And why prices go up? Every company wants to make money so they keep their product at highest possible price (but not too high so customers still buy it). And changes in the market - like recent change to electricity prices shifted everything up in costs as well passed to consumer.

What happens when a product that isn't optional goes up a lot in price? Gas and electricity for example? For example would it be illegal for the private energy companies to hike prices by say, 50% in 1 year? I mean they're privately run right? They can surely do that if they want?