20070612

Inflation

Does anyone know what inflation is?

Sometimes I really don't think so. You hear it all the time. Especially when the old timers speak up about how they could buy a gallon of gasoline for less than $1. Now with local gas stations selling petrol for about $3 a gallon the rate of increase is astounding. But you see it everywhere.

Recently local movie theaters raised their admission prices. Locally tuition has been rising at an absurd rate (The Higher Cost of Higher Education). Governments and companies are not doing enough to combat inflation.

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

In other words, as inflation increases and time passes, purchasing power for actual goods and services decreases. I present this example, at one time $1 could purchase 1 gallon of gasoline. Inflation has reduced the purchasing power such that $1 purchases 0.33 gallons of gasoline.

Governments usually try to keep the rate of inflation at 2%-3%. This is sometimes regulated by issuing currency but I don't really understand the details of the concept.

According to the economic experts some inflation is good and it indicates a growing economy. A companies earnings and revenue increase at the same rate as inflation so stockholders aren't concerned with inflation.

When investing it is very important to consider the predicted rate of inflation. Say for example you keep your money in a savings account that earns a measly 3% over the course of a year. With a starting balance of $10,000 that should come out to be $300 of earned interest. But say that inflation over the year was 4%. So in reality, even though the balance of your savings account now reads $10,300 the purchasing power of that money is less than what it started as because it did not keep up with the rate of inflation. The return on the savings account is actually -1% (3-4=-1).

Investing with the knowledge of inflation may help you out.

Also, governments and companies should do their part by increasing the wages of their employees by at least the same rate as inflation.

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