For many people, financial and economic principles are not the most interesting topics. However, the decisions that are made by the Federal Reserve Bank and elected officials have very real implications to you. The decisions impact your standard of living.
Inflation is when too much money is chasing too few goods. The end result is the increase of prices. Debt is a catalyst for growth and our country is addicted to it. Debt in the form of easily accessible money creates a climate of artificial growth.
Because we are dependent on that growth any deviation creates economic problems. The 2008 recession was a byproduct of artificially low interest and easy money. Because we are addicted to that life, The Federal Reserve decided to do the same thing it has always done, keep credit flowing and interest rates artificially low. The result is QE2! QE2 was short for “quantitative easing” the process of keeping interest rates low in order to encourage lending. The Fed started this policy last year. The policy was so controversial that many world leaders spoke out against the policy. Even one of the Fed’s governors Federal Reserve Governor Kevin Warsh spoke out against the policy. Mr. Warsh eventually resigned on February 10th.
Inflation has real implications. Have you noticed the slight increase in gas, and food prices? Inflation impacts you directly by decreasing your buying power. Therefore you will have to make more money to enjoy the products and services you did in the past. In a sense you are getting a pay cut without doing anything.
The real cost of inflation manifests with items that we need to live such as food. When food suppliers such as Kraft foods can no longer take the inflation cost they pass the cost off to you. Recently Kraft Food announced a price increase on their products due to higher cost for wheat, corn, sugar and other commodities. Higher food prices have a direct impact on you. The reason for the higher cost has been blamed on the bad weather, higher demand and higher ethanol use.
Food is not the only thing rising. Clothing costs are increasing as well. Some analysts are predicting the cost of clothing to increase by 10 percent.
According to Chris Versace from the Washington Times “This week saw several developments on the inflation front. Producer prices in the U.S. climbed during January to their highest level in more than two years, as U.S. wholesale prices jumped 0.8 percent in January fueled by rising gasoline costs. Core producer prices, which exclude the volatile food and energy categories, rose 0.5 percent, marking the largest increase since October 2008.
Moreover, by looking at the longer-term trend in the producer price data, we can see that prices are indeed on the move. Producer prices have risen 3.6 percent over the past 12 months on an unadjusted basis compared with a more subdued 1.6 percent for core producer prices over the same period.”
Inflation is not some useless economic principal it really can impact you, especially those senior citizens who live on a fixed income. In order to combat inflation you will need to do one of two things. You will need to increase your income or decrease your living expenses. The ideal situation is that you do both. In order to be in front of inflation your income will need to outpace inflation. As a result one will need to invest in ways to make extra income and decrease one’s expenses as soon as possible.