Economics 101: Understanding Inflation | WSHRW
In tougher times many Americans tend to pay more attention to news about the economy. At times, it seems as if panic spreads like contagion with everyone fearing things like mass lay-offs or stock market crashes. Keeping up with all of the economic jargon being tossed around can be a daunting task, especially if you are educating yourself. Understanding the economy comes down to a few basic principles and terms. Once you know the basics, you will be able to understand and learn about the economy much easier. And for you to keep up with the rising prices of goods, you could try and play 해외토토 online and possibly increase your income.
The term I would like to discuss in this article is inflation. Inflation can be described as the rising cost of the goods that consumers and businesses buy. The most common measurement of inflation is the Consumer Price Index (CPI), which is a variety of common consumer products whose prices are tracked. The aggregated percentage rise in the lot is the rate of inflation. For example, let’s say you go to the grocery store today and buy toilet paper for $5 and a bag of chips for $3. Then, you return a year later and purchase the same products, but the toilet paper now costs $5.25 and the bag of chips now costs $3.15. The rate of inflation on the toilet paper and the bag of chips would be 5%.
The problem with using the CPI is that the measurement is much more broad than just groceries. Things like electronics are included and they tend to often come down in price after their initial debut. So, if the rate of inflation on a majority of everyday household items products is about 5%, and the rate of inflation on other common consumer goods is near 0% due to efficiencies, then the rate of inflation is going to be 2.5%. The figure ends up being misleading because a majority of a consumer’s spending is going to everyday items, not higher end common goods that you purchase every few months or years.
While inflation often causes a strain for consumers as described above, the battle to control it is just as grueling for central banks. In general, central banks aim for a target rate of inflation around 2-3%. This rate is considered healthy for growing the economy, but not too fast to create speculative bubbles or other ailments that crash economies. Yet, according to the Library of Economics and Liberty, the highest inflation in United States history reached 13.3 in 1979 and a low of -0.7% in 1954 which would be considered deflation. To control these up and down rate movements, central banks raise and lower the interest rate that the central bank lends at. By controlling the supply of money, inflation can sometimes be reigned in.
Inflation is not always caused by monetary conditions, though. A rise in oil prices or a dramatic, broad increase in wage growth can also cause an economy to inflate. In situations like these, it can be tougher for a central bank to play a role since the contributing factors lay outside of the monetary conditions of the economy. For example, if oil prices rise and it causes transportation costs to rise, which also causes food prices to rise, then it would be tough for a central bank to lower interest rates or raise them without affecting the rest of the economy that is still running efficiently.
Inflation can bring an economy to its knees and confound economists from the around the world, yet it is something that often cannot be avoided. While economists will continue to refine their models and theories, doing their best to curb the ill effects of out of control inflation, it is best for the average consumer to simply understand the basic concepts of it. Knowing how inflation affects prices can help you to make better buying decisions everywhere from the grocery store to the bank.
Robert L. Hezel “How do central banks control inflation?” Federal Reserve Bank of Richmond Quarterly
Lawrence H. White “Inflation:The Concise Encyclopedia of Economics” Library of Economics and Liberty
Bureau Of Labor Statistics “Consumer Price Index” Department of Labor