Definition of 'Inflation'
Inflation is a macroeconomic concept expressed as a percentage increase over time of the cost of goods and services. In everyday terms, it’s the culprit when your grandfather grouses that the ice cream cone he is about to buy for $3.89 was just $0.50 when he was your age.
TheStreet Explains ‘Inflation’
Inflation is a normal and healthy aspect of an economy, but too much or too little have deleterious effects. If inflation occurs only meagerly (“stagflation”) or goes down from the year before (“hyperdeflation”), unemployment tends to go up, according to Okun’s Law. If inflation occurs too aggressively, merchants raise their prices and banks raise interest rates to maintain their profit margins, meanwhile your money buys a whole lot less than it used to. This is a simplistic account of unchecked inflation, but it makes the larger point: Inflation is a double-edged sword that must be managed, which is one of the chief jobs of central banks that print money, such as the Federal Reserve Bank.
Current thinking, based on some painful lessons and historical precedents, holds that a 2% inflation rate is reasonable and healthy. Economists measure inflation in terms of consumer price indices (CPI) composed of regular consumer goods and services such as fuel, housing, food, medical care, and transportation. This is not to say that all of the goods and services measured will uniformly increase in price by 2% each year—some may, some may not. It is to say that, on average, if 2% inflation can be detected, then the economy is likely humming along.
The Fed’s goal is not to ensure that an ice cream cone will, once and forever, cost $0.50. Instead, the Fed’s goal is to ensure that the purchasing power of your money remains stable. As prices go up, your purchasing power remains strong so you can afford the increase. If price levels for ice cream (or anything else) rise too quickly, fewer people will be able to exercise their wallets and the Fed steps in to adjust its policy to slow that increase.
Terms Related to 'Inflation':
The Consumer Price Index measures the change in cost of a represent...
The Federal Reserve, commonly referred to with no disrespect as the...
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