I know that I sometimes, in the words of one of my early elementary school teachers, do not wear my thinking cap. I’m a little confused now about money. Shouldn’t be confused at all because I have my thinking cap mounted firmly on top of my head and, get this, with the bill facing forward.

Still, I am and here’s why.

When I graduated from the Redkey, Indiana (population 1,500) high school in 1955, one of the town’s residents was wealthy. He owned three farms of about 160 acres each and he owned a quarter-interest in a local tomato processing facility.

Stories were that this man was worth about $250,000. What, you ask, with all that real estate he was only worth a paltry one quarter of one million? People today, you go on to explain, typically have a three bedroom house sitting on one-sixth of an acre (7,260 square feet) that is worth $250,000.

His worth wasn’t really known by many but if we accept his worth as $250,000, that paltry amount would buy a little over $2,000,000 in goods and services today according to the CPI Inflation Calculator. And, our $250,000 home today would have sold for about $31,000 back then.

That’s what inflation - rising prices over time resulting in reduced dollar value - does.

Big differences!

Oh sure, I know we are quick to blame inflation, the pesky thing that we all put up with every day as soon as we hop out of bed. But, let’s not give inflation a bum rap.

With my thinking cap still firmly in place, I realize inflation isn’t the only cause for higher prices and, therefore, we cannot simply apply the CPI Inflation Calculator to explain price changes of all goods and services purchased over time.

Demand, competition and technology influence prices as well.

For example a handheld four-function calculator selling for $200 in 1972 can be purchased for $5 today, 37 years later. But, we would pay $1,032 in 2009 if only an inflation adjustment determined the selling price. Technological advances in a competitive environment drove the calculator price down.

But, no matter how low manufacturers bring prices down, if and when consumer demand drops to the point that the product becomes unprofitable manufacturers discontinue the product. That happens when consumers decide a product is technological obsolete, the fate of Polaroid’s instant film.

With strong demand, manufacturers can but seldom bring the selling price down. They might even hike the price upward. The travel industry does this all the time. That’s why we pay more for a hotel room in Indianapolis when race fans are in town than we pay a week later.

In a capitalistic society, sellers will almost always charge what the market will bear. As I see it, this concept takes care of it all - inflation, technology, demand, competitive influences - from the purchaser‘s standpoint.

Sounds simple but I remain confused. Causes and effects of inflation must be the single most difficult concept to understand in the entire economic discipline.

Maybe inflation gets a bum rap and maybe it doesn’t. I’m not knowledgeable enough to know. The more I learn about inflation, the more I think, probably incorrectly, it is unnecessarily man-made by government meddling.

I don’t think anyone other than economists can even come close to understanding the beast.

Don’t believe me? Click here and you’ll see.