The First Evil Twin: Inflation

The following is a transcript of "Money Girl's Quick and Dirty Tips for a Richer Life, " a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.

Hello and welcome to Money Girl's Quick and Dirty Tips for a Richer Life.

Today's topic: Inflation.

When it comes to wealth creation, inflation and taxes are the evil twins. Together, they're the most fearsome foes you and I face in achieving a financially secure future. For your money to grow in real terms, it needs to outpace the effects of both inflation and taxes. In this episode, I want to focus on the first (and more sinister) of the evil twins: inflation.

In the first four months of 2007, U.S. inflation, as measured by the consumer price index, went up at a 4.8% annual rate(1). (Earlier you learned) about the rule of 72; you learned that at this rate, it would take only 15 years for your money's buying power to be cut in half. That means that a $60,000 salary today would be worth only $30,000 real dollars in 15 years at this inflation rate. Now that's seriously scary stuff!

OK, so why do we have inflation? There are different theories about the cause of inflation that have been debated by economists for a very long time. However, economists generally agree that inflation is associated with an increase in the money supply. That is, when the U.S. Federal Reserve issues more money, inflation tends to go up.

Two measures of U.S. inflation that you'll frequently hear used in the media are the CPI and the core CPI. CPI stands for the Consumer Price Index, which is a measure of the prices for a specific "bundle of goods" that includes items such as food, clothing and gas. The amount of inflation is measured by the change in the cost of this bundle of goods.

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