How Much Inflation have we had since 1913? Just like compound interest compound inflation grows faster and faster. The average annual inflation since 1913 is "only" 3.42%. But as you can see from the chart to the right compounding something for almost 100 years at 3.42% will result in over 2000% inflation. A 2071% increase is a hard concept to grasp so to put it another way, something that cost $1.00 in 1913 would cost $21.71 today ($1 + $20.71 inflation). Or conversely a dollar today is only worth 4.8¢ in 1913 dollars. In other words the government over the years has stolen 95.2¢ out of every dollar. … [Read more...]
How can we have Inflation and Deflation at the same time?
In common usage, deflation is generally considered to be "falling prices" while Inflation is "rising prices". Actually this is "price inflation" as opposed to "monetary inflation". For more information see What is Deflation? and What is Inflation? and Inflation Cause and Effects. So if inflation is rising prices and deflation is falling prices, how can prices rise and fall at the same time? Somehow that seems counter intuitive. Obviously, when the Bureau of Labor Statistics comes up with the Consumer Price Index it is either higher or lower than the month before so we have inflation or deflation. But that is the number for the whole economy, it includes over 10,000 items and … [Read more...]
Money Supply and the Inflation Rate
Dear Editor, I found your web site as I was doing some in depth research on inflation. In looking at the CPI published by the Federal Reserve Bank of Minneapolis you'll notice three columns. The column on the right shows the "Annual Percent Change (Rate of Inflation)" which appears to be the one you publish on your web site. However, if you do the math and take the years 2006 & 2007 as an example, you'll see that in 2006 the CPI (center column) was 201.6. If you then add 2.9% (right column) you get 207.3 (center column) for 2007. The column on the right merely reflects the percentage of change over the previous year and is not the true inflation we're having. According to the … [Read more...]
How does the “Falling Dollar” and the exchange rate affect Inflation?
With all the recent talk about the "falling dollar" will that affect the inflation rate? Let's start with the basics. 1) Price inflation is primarily caused by monetary inflation. In other words as the money supply increases things cost more. See What is Inflation? for a full explanation. 2) The government controls the money supply to a certain extent through tightening or loosening credit. 3) The economy is extremely complex and many other factors come into play. Such as international exchange and the supply and demand for goods and services. At first blush it might appear that the falling dollar would cause deflation because the dollar is going down. But if the dollar is … [Read more...]
Define Inflation: What is Inflation?
What Is the Real Inflation Rate?
I recently received the following question: Please explain to me how my cost of living can increase by 10-15 percent, grocery bills, fuel, energy, clothing, etc. yet my income only increases about 2-3% which typically matches inflation. I have talked to many people about this and a lot of folks feel the same way, how can inflation only be 2-3% when the cost of living keeps going up 4-5 times that number. I am a college student, but only in my first few years so please explain this in basic terms so that I may understand. Thank you tremendously, Jessica This is a common question-- often, it is phrased as "What is the real inflation rate? Who do I believe?" … [Read more...]
Who Does Inflation Hurt Most?
Who does inflation help and who does inflation hurt? When we first think of inflation we assume that it will affect all people equally. After all if everyone is using the same dollars wouldn't everyone be affected equally? The fact of course is that everyone isn't affected equally. Our second assumption might be that the poor would be hurt the worst because they earn minimum wage and everything they buy is getting more expensive. However, if the minimum wage is indexed to inflation they would about break even. So interestingly if the minimum wage earners are also deep in debt inflation actually helps them. The reason for this is that debtors borrow valuable money and the number of … [Read more...]
Inflation Falls by Half – As Hurricane Katrina Effects Wear Off
At 2.06% September's Annual Inflation rate came in at almost exactly half of the 4.15% Annual rate that existed only two months earlier in July. But does that mean that all of our inflation worries are over, the FED’s tightening has worked and all is right with the world? Not Hardly! I certainly wish we were reentering the days of low inflation, low interest rates and a recovering economy. But that is not the case this month. What we have is a simple rebound effect from… believe it or not… Hurricane Katrina. It is hard to believe but the one year anniversary of Hurricane Katrina has passed. With it’s passing we have the spike in prices that it caused passing too. The interesting … [Read more...]
Protect Yourself From Inflation
Inflation Warning!!! How do you protect yourself now? In a recent article, I discussed how Gold was not strictly an inflation hedge but more a crisis hedge against worry of all sorts. See How has Gold fared as an Inflation hedge? In another article, How the Iraq War will affect the U.S. economy, I discussed how a wartime economy almost guarantees future inflation. So naturally several readers wrote to ask, “What is the best way to protect against inflation?” … [Read more...]
Inflation and the Iraq War
Inflation Warning!!! Inflation is already "baked into the cake" You need to protect yourself now! Wars almost by definition are inflationary. This has been true since almost the beginning of time. Inflation is determined by the quantity of goods vs. the available money supply. See The Definition of Inflation The very nature of War results in the destruction of goods. But in normal times money is spent to produce goods which makes the world a richer place. During a war, however, things are produced but... they are not productive things but destructive. The money is spent to destroy things. Often this is combined with an increase in the money supply in order to pay for the … [Read more...]
