“If you want to get someone’s attention, hit them in their pocketbook.”
This saying has been around a long time, but the truth becomes blatantly obvious as gas prices rise between fillups, groceries cost more each time they’re purchased and utilities and housing costs skyrocket.
Inflation receives the bulk of the blame, but exactly what does that mean?
As it pertains to economics, inflation is defined as a general increase in prices accompanied by a decrease in the purchasing power of money. The rate of inflation is commonly measured by the Consumer Price Index.
This rate is computed by taking a weighted average of price increases in the products a typical consumer purchases. The products are weighted because consumers buy some items in larger quantities, affecting them more than items bought in smaller quantities. The CPI also takes into consideration the price of a product. A 10 percent increase in the price of a car exerts a much bigger effect than a 10 percent increase in the cost of a candy bar.
The U.S. Bureau of Labor Statistics includes the following categories in its representative consumer products: housing (41 percent), transportation
(17 percent), food and beverages (16 percent), medical care (6 percent), recreation (6 percent), apparel (4 percent) and other (4 percent).
The principle of supply and demand applies to inflation. If the money supply increases by a larger percentage than production, prices rise.
Inflation exerts a negative effect on all consumers. The effects on lower income earners are magnified, however, Since these earners pay a larger proportion of their incomes for daily living expenses, health care and education, inflation makes it even more difficult for these earners to afford necessities.
Savings suffer because money saved for future use will have less value. Investments aren’t as attractive when inflation rises because any profit anticipated must factor in the added cost of inflation. A decrease in investing harms the wealth of the nation. Inflation harms the economy.
The government is culpable. The government spends money it doesn’t have. The government has no way to acquire money unless it confiscates it from citizens through taxation or prints money. The government has been printing a lot of money lately and promises to raise taxes as well.
Inflation is a boon to the government because the government has borrowed huge numbers of dollars it will pay back with devalued dollars. Inflation also raises nominal wages and pushes people into higher tax brackets, resulting in more tax dollars for the government. The main beneficiary of inflation is the government.
Despite inflation being useful to governments, history is replete with examples of excessive inflation in which currency becomes worthless. Economies tend to break down whenever this happens.
The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is high, the Federal Reserve raises interest rates to slow the economy and bring down the rate of inflation. If inflation is low, the Federal Reserve lowers interest rates to stimulate the economy and raise the inflation rate. The work of the Federal Reserve is not an exact science.
As the government continues to spend money it doesn’t have, the value of the money consumers spend will continue to decrease in value through inflation. The pain has just begun.