Posts
Definition
The government, with the help of some really smart economists, has defined a "basket of goods" typically purchased by a run-of-the-mill urban consumer. The basket consists of, quite literally, thousands of different items. Government economists track the prices of these goods and compiles a statistic known as the Consumer Price Index (CPI). When the CPI increases, this is known as inflation. Conversely, a decrease in CPI is called deflation. The inflation rate is the change in CPI represented as a percentage.
The Problem with Inflation
Inflation is an increase in prices, but the best way to think of inflation is as a decrease in the purchasing power of the dollar. If inflation rises rapidly, people will rush to spend their money quickly before their purchasing power declines even further. Inflation will distort investment returns and taxes. Unchecked inflation can have a catastrophic effect on an economy. In order to maintain the purchasing power of a currency, central banks work hard to keep inflation under control by tightening or expanding the supply of money.
The United States
Unlike Germany in the 1920s and Central America towards the end of the 20th century, the US has never experienced a period of hyperinflation. (A rapid increase in the inflation rate where inflation appears to be out of control.) Our worst period for inflation was the period from 1973 to 1981 which saw four years of double digit increases in the inflation rate (including an inflation rate of a whopping 13.58 in 1980). The inflation rate in 2008 was 3.85% which is slightly higher than what economists would like to see (2%).
Further Reading
No comments:
Post a Comment