The key is to understand what inflation is. The definition of inflation that economists use is “too much money chasing too few goods.” If you break this down, you’ll notice two parts. There is a part for amount of money and a part for goods. The word “good” means anything you buy with money, which can be things, services, experiences, etc. Notice that there is a relationship between money and goods. This relationship is driven by supply and demand, but an easy way to think about it is that there must be a balance between the two in order for the value of goods to remain stable.
How can one get too much money? The question that comes from this is: How is money created? Today’s money is called fiat money. Fiat means “by decree” or “by law”. When you see the words used “by law”; this can be interpreted as “violent”. Because the laws are enforced by the police or the military, which literally means that they will harm you if the laws are not obeyed. Think mafia, but legal. This means that we have no choice about the money we use if we want to comply with the law. By definition, other forms of money cannot be used for transactions or the purchase of goods. Try using gold or silver coins or cryptocurrencies to pay taxes in Canada. Only Canadian dollars can be used. The other key term to remember is that today’s money is a debt unit. When you hear the word debt, it means that someone owes the money that was created, as in a loan. There is interest associated with this loan, just like all other forms of debt. Since the interest is on a country’s currency, the interest is borne by the country – meaning the country’s taxpayers. This is where the income tax system comes into play. Have you noticed in the last 2 years how much extra money was “created” around the world? Is there a limit to how much money can be created? There isn’t, and so too much money can be created quite easily and without much oversight.
What about the goods? Due to the government’s response to the pandemic, people are unable to produce the goods they used to produce because they are forced to stay at home or close their businesses. Workers are also paid to stay at home instead of producing. You can add in reduced demand from people who can’t shop, and the amount of goods produced will continue to decline. There have been parts shortages and delivery delays lately. Because of the just-in-time headache that is today’s logistics, any small disruption will create a ripple effect that will exponentially compound the delay in getting manufactured goods. The more complex the product and the more dependent on logistics, the longer the delays and the greater the disruptions.
What you are witnessing now is the two forces coming together at the same time – too much money and too few goods. Will this continue? Given that governments will create more debt to pay off old debt, this creates an exponential effect that will approach an unlimited amount of money being created. It also means that the current fiat currency will become more worthless and may be abandoned. Inflation will continue until the form of money is replaced by something scarce and limited and manufactured goods stabilize. The two parts of the equation will then balance again. To counteract the forces of inflation, this means less money or debt creation combined with more goods produced.