The Decreasing Value of The Dollar

Neil Griffith, Senior Editor

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Three things are certain in life; taxes, inflation, and death. But what is inflation? Inflation is the increase of prices and the fall of the purchasing value of money. The cumulative inflation rate since 1913 is 2352.9 percent. This means something that cost only one dollar in 1913 would cost almost 25 dollars today. For a typical year, the Federal Reserve tries to keep inflation within a two percent window per year, meaning if something cost one dollar last year, that it would cost one dollar and two cents. “We are now much closer to the Federal Open Market Committee’s 2 percent objective than we were just a year ago. Prices, as measured by the index for personal consumption expenditures, rose nearly 1-1/2 percent in the 12 months ending in November, as compared with only 1/2 percent during 2015,” said Federal Reserve chairperson Janet Yellen. When inflation gets too high, it is never good for individuals or the economy they live in. Unless interest rates are higher than inflation, the value of money will keep reducing. The higher inflation gets, the less investors see in return.
Now to most the idea of inflation seems rather upsetting. But there are ways that it can be helpful to the economy. The theory that when the economy is not running as well as it could be, such as having unused labor or resources, this theoretically helps increase companies’ production rates. More money equals more spending which in turn equals more production to meet that demand. Inflation could also help the economy by making it easier on the debtor. It does so by allowing those debtors to repay their loans with money that is valued much less than it was originally borrowed for. This pushes people to borrow more, which again, increases spending throughout the economic classes.
Inflation can take two different forms. Those are demand-pull inflation, and cost-push inflation. Demand-pull is much more common in today’s economy. The way it works is when the demand for a good or service is higher than the company can output, thus a rise in prices in an attempt to decrease purchasing so the said company can find equilibrium in the supply and demand cycle. Cost-push inflation is fairly similar to demand-pull, but it has different triggering factors. The cost-push is from a shortage of the supply and enough demand for suppliers to raise prices. But this method can be triggered by wage inflation, government regulation, or a fall in the exchange rate thus causing cost-push inflation through imports.
So next time you hear about inflation, think about it. Cherish the prices you have today; they might not stay that way for long.

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