Nine out of 10 Americans do not understand inflation.
Inflation is a growth in the money supply. The Federal Reserve creates additional money, and it enters circulation. Since there is an increase in the number of dollars available, each dollar buys a little less.
Think of it this way: you have a used car. It is the only one. You can ask what you want since the buyer can’t go anywhere else and buy that car. If there are three identical cars for sale, you need to discount your car to sell it. Money is the same; more money in circulation means each dollar buys a little less. So it requires more dollars to buy the same item, not because the item is more expensive but because the dollars buys less and it requires more dollars to purchase it. Prices go up.
A common example is a can of soup. Last year the soup cost 90 cents. Today, the same can of soup costs $1.19. Same soup, same can, same store. The only thing that has changed is the dollar. It requires more of them to buy the same item because there are more of them.
Government prefers inflation to deflation or stagflation for three reasons:
Inflation stimulates the economy of the country. Spend your money today since it will require more to buy the same item tomorrow.
Inflation decreases the value of government debt: The deficit will be paid back with cheaper dollars. If you owe $100, you will still pay back the $100, but they will be easier to obtain since there are more dollars.
Inflation increase tax revenues. Since prices are higher, more money is spent, and more taxes are collected.
In business classes at Globe University– Woodbury, we talk about debt. If you believe inflation is coming, it is a good time to be in debt. Purchasing a home in an inflationary environment preserves your money since most often the value of the home increases as much as the inflation rate. If you have loans, they are easier to repay since the loans are a set amount of dollars, and the dollars are easier to obtain.
Currently, most experts feel we are in a deflationary period. If we are in a deflationary period, you don’t want to be in debt. Deflation means less money in circulation, so money is more difficult to obtain. You will notice this in falling prices. To sell items, the stores discount the price. You notice falling prices. If you have a loan, you will work harder to repay the loan. Each dollar is slightly more valuable.
Understanding the financial environment of the country can give you an advantage in your personal finances and have a significant impact on your lifestyle and future plans.
Check out this inflation calculator: http://www.westegg.com/inflation/
- For the amount put $100.00
- For the year put the year you were born.
- Hit submit.
The result is how much it would cost to buy today exactly what cost $100 on the day you were born.
If this topic is of interest to you, you might want to check out the business degree program levels of study that Globe University offers on-site and online.
Written by Thomas Hakko, Business Program Chair at Globe University – Woodbury.