What is Inflation?

A period of time when your dollar buys less.

To most people, inflation means that over a period of time, their dollars buy less. We feel the effects of a shrinking dollar when our incomes fail to keep pace with the rise in prices.

Inflation is defined as a sustained or long-term tendency for prices of goods and services to rise. To most people, inflation means that over a period of time, their dollars buy less. We feel the effects of a shrinking dollar when our incomes fail to keep pace with the rise in prices. Not all price increases are inflationary, however. Prices may rise in the short term because of a change in the supply and demand. For example, there may be an abundant harvest of a particular crop one year because of excellent growing conditions and the next year may be a poor year for the same crop. This situation may cause prices to change, but the changes may even out over a period of time and not be inflationary.

The rule of 72

The rule of 72 is a convenient means of measuring the impact of inflation. Simply divide the inflation rate into 72 to find out how long it will take a dollar to be worth half its present value in terms of real purchasing power. For example: An inflation rate of 12 percent means that the worth of each dollar will be reduced to 50 cents in only 6 years. Even a 6 percent inflation rate halves the purchasing power of each dollar every 12 years.

Many people associate inflation with everything bad that is happening to themselves and the economy. In this case, inflation affects morale, our confidence in ourselves and our attitudes toward others. These attitudes are often in conflict.

For instance: As a worker, you may want to receive higher wages but at the same time want to buy goods and services at low prices. Those who produce the goods and services you want to buy at low prices want just the opposite—high prices for their products.

Lower production may contribute to inflation.

The push to get more and contribute less may be reflected in a lower worker productivity. This adds to inflation. Unproductive workers don't help our economy compete with countries that are more productive. As a worker, you can fight inflation by being the best worker that you can be. As a consumer, you can cope with inflation by looking for ways to reduce your spending.

For more information on inflation, contact your local county Extension office.