Inflation and Our Economy

March 10, 2017
4 min. read time

How Inflation Impacts our Economy

Our economy is doing better than it has done in a long time. As more and more people in the US are finding work, the unemployment rate is steadily dropping. This is great for the economy of our country as people and businesses are buying, selling, and trading and in turn stimulating the economy.

One important factor involving economic stimulation is inflation. Inflation is important to understand if you want to realize why interest rates may be going up soon. Inflation, simply put, occurs when prices for goods and services increase, but the value of the dollar decreases. Inflation is controlled by making sure that the costs of goods and services are proportionate to the amount of money that people are making. It also controlled by making sure that the physical amount of money that the  Federal Reserve is printing isn’t being over produced.

The downside to a thriving economy, is that the same factor that makes the economy thrive is the same factor that can take it down. If more money is being earned by the public, more money is being printed which makes the value of the dollar go down and the cost of living go up.

Let’s illustrate with an example about name brand sneakers. The reason why sneakers are so expensive is because in a lot of cases, the manufacturer only makes so many pair (or in our case, the Federal Reserve only prints so many dollar bills). When people start making more money, they can buy more sneakers. If more and more of the same sneaker is made, the value of that sneaker goes down, because the amount of sneakers being produced has gone up. So, to recreate the exclusivity, the manufacturer increases the price of the sneaker. This brings back the value of the sneaker and ensures that the manufacturer is still making a profit.

By the same token, when we as citizens make more money, the Federal Reserve has to print more money to ensure everyone gets paid, but the faster the Federal Reserve prints money the faster the dollar loses its value. When the dollar loses its value, manufacturers have to raise the cost of goods and services to still make a decent profit. This is an example of inflation, and to counter it, the Federal Reserve increases things like interest rates and taxes.

By increasing interest rates, the Federal reserve is basically making us spend more money on things that are vital to everyday life (mortgage loans, auto loans, credit card loans) to control the amount of money that is circulating within the nation. When rates are increased some people are cut out of the market meaning the spending of the nation as a whole is slowed. In some circumstances (like the one our economy is in now) the Fed has to up the interest rates in order to control spending. Unemployment rates are dropping which means more money is being circulated. This is good for a little while, but if we start making too much money and too much money is printed, we lose the value of our dollar.

Janet Yellen of the Federal Reserve has been discussing interest rate hikes openly in the first couple of months of this year. The Fed can almost guarantee a rate hike and it’s definitely coming soon, as we know the next meeting of the Federal Reserve will be held mid-March. Though a surge in interest rates may make borrowing more difficult (but not impossible) for some borrowers, the idea is that it will help the economy as a whole by controlling inflation.







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