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Inflation - What You Need To Know About It

Aug 21, 2008
Over the past couple of decades, one might have begun to think that inflation was a dragon that had finally been slain. Today, though, with food, gas, and nearly every other daily expense skyrocketing it is becoming crystal-clear that this is just not the case. With inflation on the rise, and a recession an almost inevitability, perhaps it is time that we refresh our memories on just what these terms mean.

So, what exactly is inflation, you might ask? Some experts claim that inflation is the phenomena that results from the supply of money exceeding the amount of goods produced in this country. This results in consumers willing to spend more on goods in demand. In turn, the goods producers raise prices until the supply meets that demand and no higher price can be gained. The net effect: an overall lowering of the value of a dollar.

Other factors that can influence the rate of inflation include pressures on the economy from other countries. If a certain country experiences inflation of it's own, then the price of goods from that country will rise. This, in turn, causes the costs of importing that item to this country to rise, which results in inflation in this country.

This is the way inflation works, no matter what the currency or country. Every country takes some sort of steps to try to manage inflation, with varying degrees of success. In the United States, we have a central bank called the Federal Reserve that tries to manage inflation through the careful management of credit and money supply.

In recent years the Federal Reserve has attempted to manage inflation through the management of interest rates. By lowering interest rates, the Fed effectively increased the amount of money available to loan to businesses and consumers. This short-term strategy has a long history of causing more problems than it solves though. By keeping interest rates artificially low, too much money was dumped into the economy, which caused the value of the dollar to decrease and ultimately resulted in inflation.

Now, the Fed is between a rock and a hard place. Mr. Bernanke of the Federal Reserve recently stated: "Inflation has remained high and the possibility that commodity prices will continue to rise is an important risk to the inflation forecast." In other words, if the Fed were to raise interest rates, it would exacerbate an already damaged global economy.

Statistics have shown that the prices of food and other necessities in the U.S. are growing at an alarming rate. For example, gasoline is up 1.3%, home heating oil is up 13.1%, diesel fuel has risen to 15.3%, eggs have gone up 25%; milk is up 13%; poultry has risen by 7%; and inflation is up almost 3%.

The bottom line is, inflation is here again and will continue to be a part of the economic conditions in this country for the foreseeable future. Worse yet, it is becoming increasingly clear that the Federal Reserve is powerless in trying to manage inflation. You should keep this in mind as you try to manage your finances to accommodate inflation, and take steps to do whatever is necessary to keep the inflation demon at bay in your life.
About the Author
Inflation is just one factor to consider in managing your personal finances and investments. For more information on personal finance management from retirement plans to budgets be sure to visit http://www.personal-finances-blog.com today.
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