Economy Shock

Despite reports of slowing inflation from Federal Reserve policymakers, Americans remain highly concerned about the issue and lack confidence in the Fed to keep inflation under control.

The latest Rasmussen Reports national telephone survey finds that 81% of American adults are somewhat or very concerned about inflation, down just two points from July and four points from April. That figure includes 57% who say they are very concerned

MB: Clearly many Americans are very concerned about the possibilities of inflation, the real  issue is whether or not they should be.  The best way to answer this question of whether or not we should be concerned about inflation is to simply look at the definition of inflation and then compare data that is available today.

According to www.investorwords.com inflation is”The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won’t be able to purchase as much with that dollar as he/she previously could.”

So what causes an increase in overall consumer prices?  A major contributor to an increase in prices is the money supply; as the Fed prints more money the value of the dollar generally becomes weaker (all other things constant).  Another determinant that could cause higher consumer prices is an increase in production costs such as labor, metals, or other commodities; increases in production costs will lead to organizations charging higher prices to maintain profits. 

Inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level.

These are just a few examples of events that can increase the overall price for consumers which could lead to inflation. Clearly Americans have a right to be concerned, our debt is unsustainable (we are a debtor nation), our money supply has increase drastically in a short period of time, and an increase in the amount of money that we are borrowing from China is extraordinary.

However high unemployment rates, record high consumer saving percentages (around 5% of income), high competition, and low consumer spending should keep inflation in check for the time being.  This is not to say our country and the Fed will need to face this issue in the near future; large amounts of borrowing and stimulus spending is a perfect recipe for hyper-inflation. 

Source:

http://www.rasmussenreports.com/

http://www.investorwords.com/

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