What is inflation?
It is the general increase in the price of goods and services over time or the devaluation of currency.
How does inflation affect the US dollar?
Inflation directly translates into the dollar loosing purchasing power. The price for items increases and more money is required to purchase those items. Ultimately, the dollar buys fewer goods and services than it once did.
Does the inflation rate ever change?
Rates are calculated over time using the Consumer Price Index (CPI) and they do fluctuate. According to the Bureau of Labor and Statistics, from 1914-2013 the United States averaged an inflation rate of 3.35%. Records include the highest inflation rate during June of 1920 at 23.70% and the all-time low of -15.80% in June of 1921. In a healthy market, inflation averages between 2% and 3% and results in wage growth.
What causes inflation?
There are several explanations which include the printing of more money, National debt, exchange rates, and two theories called cost-push and demand-pull effects.
When the cost of business increases it is passed on to the consumer through higher prices. These costs may include increases in wages, shipping expenses or additional taxes and fees. For example, berry pickers demand a higher wage, which increases harvesting expenses, which causes the store to pay more for the berries, which means the consumer pays more at register.
The influx of money creates increased demand for goods and services then suppliers can increase prices to keep supply and demand in balance. For example, low interest rates encourage borrowing, which allow people to spend more money in the economy (buying houses, cars, etc). Merchants can charge more for their products because there is more money chasing goods and services which causes inflation.
How Neighbors can help:
Learn more about financial topics at one of our branch workshops which are free and open to the community. Call (225) 819-5748 or visit the "events” section for more information and to register.