Inflation is a rise in prices
or a decrease in the purchasing power of money.
While sometimes individual item prices may climb
due to shortages or increased demand,
inflation is generally measured
across a wide range of goods and services.
This increase or decrease in prices across this range
is expressed as a percentage point.
For example, since 1960,
inflation has increased an average of 3.79% a year.
That means that prices today
are about 10 times higher than back then.
What $1 would buy in 1960 now takes $10.
Inflation by itself isn't necessarily a bad thing.
If you own property or commodities, some level of inflation
means that your goods are increasing in value.
If you have a fixed-rate loan, inflation means you're paying
the same amount of money each month
but getting a higher value for it.
Inflation can stimulate the economy
by encouraging higher rates of spending,
both in investments, as people seek higher gains
than those yielded by inflation,
and in general spending, as fears of greater inflation
leads consumers to buy now rather than later.
On the downside, consumers have to pay more
for goods and services.
And any money that is not invested
in a high-yield savings vehicle
is essentially losing value over time.
Wages may not keep pace with inflation,
leading to even further decreases in purchasing power.
If not kept under control, inflation could skyrocket
to the point where money essentially becomes worthless.
The Federal Reserve, or the Fed,
is tasked with controlling inflation.
Typically, they do this by adjusting interest rates.
If inflation is low, they lower interest rates
to try to boost spending.
If inflation is high, they raise interest rates
to try to slow down the economy.
Raising it too high too fast, however,
can cause a recession.
Generally, the Fed tries to keep inflation
to an average of 2%.
This is just high enough to keep the economy growing
and prices stable.
If you'd like to learn more
about the Federal Reserve and how it works,
check out their website at federalreserve.gov.