Inflation
What is inflation? Here is an example, if inflation was four percent in one year and you bought something for 1.00 the previous year, it would now cost you 1.04 dollars this year. In other words, it takes more money to buy the exact same goods and services. Inflation is calculated by what is called the consumer price index. Economists take a basket of average consumer products and using that information they get a good idea of what inflation was in any given year. Central banks typically like inflation to be at about two to three percent a year. If prices are not going up, this can devastate an economy. We have been experiencing this over the last little while with home prices and the stock market going down. This is called deflation, which is the opposite of inflation. What do central banks like the Federal Reserve do to fight against deflation? Well, there are a few things that they can do to fight against deflation. They can lower the interest rate at which banks borrow money from it. The idea with this is that the lower interest rate will put more money into the economy, thus increasing the supply of money in the system thereby decrease the effects of deflation. When you increase the supply of money in the system the value of the money goes down. Inflation is the enemy to savers. It can eat away at your savings and other fixed value investments. To give you an example of a fixed value asset would be a stamp that has a face value on it, or a dollar bill. To learn about investments that fight against inflation that are backed by the US government you can go to treasurydirect.gov.
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