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Everything You Need to Know About Inflation

April 30, 2018

Everything You Need to Know About Inflation

It’s been said that when the U.S. sneezes the rest of the world catches a cold.  Inflation by overall annual average has been below target for some years now, since 2012 to be exact. The Fed usually seeks a 2% inflation as a comfort zone.

Granted, it’s only one data point but with unemployment currently low and some signs that economic growth is accelerating, the suggestion exists that overheating/inflation is a risk for the U.S. economy in a way that hasn’t existed for about ten years.

What is inflation?

Inflation is when the buying power of a currency declines over time.  If inflation is 2% that translates to a basket of groceries which cost $100 today costing $102 a year from now.

But since prices rise and fall and we each buy different articles how is that tracked?  Government statisticians and economists create indexes to reflect a full range of products and services that are consumed weighted by how much the average household spends on each item.

Various ways of measuring are done by comparing the decline of the U.S. dollar compared to other currencies or to gold.  The aggregate of the items compared can show how prices are changing over time considering the range of items the average household purchases

This leads to the next question, “is inflation good or bad?”

It can be either.  In places like Venezuela today or Zimbabwe a few years ago, inflation was so out of control that the currency ceased to function as a means of exchange and the population was forced to resort to a barter system.  This led to a breakdown in the two countries’ financial systems.

 

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