What is Inflation and Why Should I Care?

Last time, we talked about deflation; that is prices and wages fall in general. We are in a deflationary period and I know you don’t like it. As you can see, in today’s stock market, it is very hard to make any money. The reason why my bond portfolio is up over 19% this year and 72% from the bottom of the market in January 2009 is because we are in a worldwide deflationary period.

The government is telling the news services to announce that we are not in a deflationary period but a disinflationary period. They are also telling you that we are in a “Great Recession.” The Federal Government is scared of deflation which is a symptom of a Depression. At this time, people do not invest, buy goods, and we have a great number of unemployed or underemployed. If you have not figured it out by now, we are in the first “Great Depression of the 21st Century.”

So What is Inflation?

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling, according to Dictionary.com.

Investopedia puts it this way. As inflation rises, every dollar will buy a smaller percentage of an item. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. That means that your money will lose 2% or in this example 2 cents of its value in a year. That is because you will have to pay 2 cents more next year for the same product.

Investopedia says that most countries' central banks will try to sustain an inflation rate of between 2-3%.

But it is hard for governments to do that because they are playing with so many variables, like, imports, exports, private consumption, government spending, and investments. For example, if the amount of investment falls, who is going to pay the wages and open the factories so that the products could be made? If the Government has to fight two wars and at the same time payout a high volume of money for Social Security and road repair, that may make inflation get out of control. If consumers get scared of losing their jobs, they will not spend any money. That will cause the economy to fall into a recession or depression like we are in today. If the people buy more products than we sell to people in other countries, that could cause our money to lose its value. That is inflationary.

So what would you like to see more of; Inflation or Deflation? Too much inflation and your money will be worthless. If you have too much deflation and you will not have a job or buy goods and services.

If you want to understand how business interacts with the US Economy, look at this slide show.
http://www.bergen.edu/faculty/ldeane/ib1/sld001.htm

Next time we will look at Stagflation.