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Inflation: What Is It And Why Does It Happen?
By David Berky
"Inflation is the overall or specific increase in the cost of a good or service."
Thank you, Mr. Dictionary.
Inflation is when your mom or dad complains about the prices they have to pay nowadays
compared to what they paid when they were a younger.
"I remember when a candy bar only cost a nickel." "I used to buy gas at that station
for 15 cents a gallon." "When did milk get so expensive?" "You paid HOW much for your home?"
Inflation in America has been relatively steady. There have been some periods of high
inflation, such as was seen in the 70's, but on average inflation in the US has been
steady at about 3% for the past 30 years. Some countries have experienced inflation
above 1000% in a single year.
The 3% figure is also pretty close to the average as you go further back in US history.
So we will use the 3% figure as we discuss the effects of inflation.
A detailed analysis of the cause of inflation is beyond the scope of this short
article, but we can mention some things that tend to cause inflation.
Increases in government taxes and fees can lead to inflation (especially when
businesses are taxed). When the cost of business goes up, product prices go up. When
prices go up your income effectively goes down. Then you have to work harder or find
a better job. Or hope that your employer will give you a raise. Which then makes the
business costs go up and so prices go up and so on.
Also when your personal income taxes, property taxes, sales taxes, auto registration
fees, etc. increase you are forced to live on less or hit the boss up for a raise.
If you get your raise (and several of your co-workers also are given raises) the cost
of doing business has gone up. The business will then pass the extra costs on to their
customers - inflation.
Inflation can also be caused by scarcity. If there are only a 10,000 Beanie-Babies,
"Tickle-Me-Elmos", "Chicken-Dance-Elmos", or what ever the current toy-craze is, and
there are 100,000 people that want one, the price is going to go up.
If mad-cow disease causes cattle ranchers to destroy large portions of their herds
and there is less beef on the market, the price of beef will go up. If interest rates
go up, inflation can also result. If it costs more to borrow money, the cost of doing
business has gone up and so will product and service prices.
For the last 10 years inflation has been relatively low. It is my uneducated opinion
that inflation has been minimal because people have relied on the stock market boom
of the 90s to supply extra cash. Also many people have taken on additional debt
rather than curtail their spending.
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