What is inflation?
Inflation is a term that has a variety of definitions. What we really mean here is rising inflation rates, which measure the amount of inflation in a country or local area. In some cases, “inflation” is a sign of economic growth. The U.S. Department of Commerce categorizes the country’s inflation rate into two categories: Consumer Price Index (CPI) and Wholesale Price Index (WPI). CPI is used as a general measure of inflation because it is based on a basket of goods and services that are consumed by the general public. WPI is another inflation gauge, and it is used to measure the cost of wholesale prices. If you are in the retail trade or are a wholesale or retail dealer in goods or services, WPI is a good gauge of the purchasing power of your trade.
How does inflation work?
Over time, the value of money goes up as measured by the consumer price index (CPI). During economic downturns, the Federal Reserve creates new money in order to stimulate the economy. As those dollars circulate in the economy, those dollars become worthless and less each year. The inflation rate increases, and with inflation comes an overall reduction in the purchasing power of a dollar. The Fed tries to curb the rising prices of goods by creating money in order to stimulate the economy. That means the Fed can reduce the amount of money in circulation and buy some of those dollars back from the market. Every so often, the Fed will raise interest rates in order to keep inflation at bay.
What are the most common causes of inflation?
For many American households, one of the main factors behind the rising cost of goods and services is the ever-increasing cost of gasoline. According to GasBuddy.com, average U.S. gasoline prices hit $2.80 per gallon this week, the highest price recorded in the country since 2014. Gas prices in Michigan have nearly doubled since Memorial Day 2017, while the state as a whole has increased costs by 11 cents per gallon in the last month alone. Fuel prices are not the only economic challenges facing consumers right now. The cost of housing is also increasing. According to a recent report from Trulia, a home in the Rust Belt like Michigan with the median cost of a home (based on median household income) was $90,100 in 2000. In 2016, the median home price in Michigan increased to $154,100.
How to prepare for inflation
The U.S. has entered into the “Fiscal Cliff” — or as the locals like to call it, “The end of the world.” The multi-trillion-dollar package of tax hikes and spending cuts aimed at slashing the federal deficit could send America back into recession and trigger another global financial crisis. Meanwhile, most other advanced economies are also facing slow growth and increasing tensions over high debt levels. In all likelihood, we are just one major economic shock away from a second financial crisis in the space of just a few years.
Most people associate inflation with economic collapse. This is how it’s been depicted for so many years that it seems like everyone has thought it. But what if inflation is not the issue? What if, instead of economic collapse, inflation is the issue? In an article I wrote a few years ago, I talked about how it was time to get comfortable with the idea of inflation. Back then I didn’t have much concrete information to support my position; however, I felt that something was going on, something that should be addressed. Today, I have a much more concrete, positive vision for what will happen in the next 10-20 years. More importantly, I have learned that there are steps that everyone can take that will help improve their financial security.