The Real Reason Inflation Won’t Stop – A Simple, Beginner-Friendly Summary

When the economy is strong
As the economy improves, everyone's income increases, and demand for goods and services grows. As a result, the prices of goods and services rise. If there is high demand but insufficient supply, prices go up. This is inflation. And since higher prices require more money, the amount of money in the economy increases.

When the economy is weak
Conversely, when the economy is weak, everyone's income decreases and demand for goods and services falls. As a result, the prices of goods and services drop. This is deflation. And because lower prices mean that the amount of money in circulation can be smaller, money tends to accumulate.

Central banks tighten policy during inflation and ease policy during deflation. There are two methods: 1) adjusting interest rates, 2) adjusting the money supply. This is monetary policy. Today we are talking about 2, but of course central banks do adjust the money supply.

Up to here is the standard textbook explanation, but
There are situations worldwide where prices rise even when the economy is weak (inflation). Of course governments sometimes publish figures like “the economy is good,” but those figures can be interpreted in various ways depending on how they are measured. In Japan today, wages in listed companies are rising, but poverty is also increasing. Some people call this polarization, but it is also a view that cannot conclude that the economy is good. I will talk about this in more detail another time, but for today I would like to summarize with one important point.

From now on, inflation cannot be avoided, whether the economy is good or bad. As explained above, we are in a world where it's no longer simply “good economy with inflation” or “bad economy with deflation.”

The reason is simple: since 1971, countries have printed too much money. Until 1971, there was the gold standard, and countries could not print more money than the amount of gold they held. In other words, paper money was a redeemable token with a value tied to gold. But after abandoning the gold standard, money issued under a country’s credibility can be produced without limit, so many countries have supplied large amounts of money for decades. The final point of this is the post-COVID largesse.

Having too much money means the money itself is losing value. That is why gold and silver have surged recently. I often tell students that even if you try to measure the value of the dollar in other fiat currencies like yen, euro, or pound, the comparison is flawed since those are themselves fiat currencies. Therefore, a more precise measure of value is gold, which is why its price is rising. Cryptocurrencies like Bitcoin behave similarly.

It is not so much that the prices of goods and services are rising; rather, the value of currencies is falling. This trend is unlikely to end anytime soon. That is why many countries are considering government-issued digital currencies.

When thinking about long-term investments for the future, please consider this as a reference.