Inflation Is No Longer Sleeping
As food prices continue to rise, with gas prices off the charts, and with 80% of Americans asserting they think we are in a recession, the bottom line is that inflation is no longer sleeping either.
What causes inflation? According to one source, inflation arises when the increase of money supply exceeds the amount of goods produced. Juxtapose this with the fact that as goods increase, the money supply also has to increase so that prices decrease. Sounds a bit crazy, but therein lies the problem.
Another source explains it this way: When the money supply is increased, then people naturally have more to spend for goods. This has to do with the fact that the more money generated by the government results in a decrease in the value of that dollar. This essentially means that the companies who provide goods have to raise prices in order to receive a profit margin that is acceptable.
Yes, it’s all about the dollar. For example, as the value of currency begins to deteriorate in many countries, then it costs more money to import those goods – which causes inflation.
Just after the sub-prime mortgage fiasco, the Federal Reserve began cutting interest rates, thus enabling more money to enter the financial system. Although this was thought to be a short-term remedy for a long-term problem, it nonetheless posed another one; too much money decreased the value of the dollar and inflation occurred.
According to Mr. Bernake of the Federal Reserve, “Inflation has remained high and the possibility that commodity prices will continue to rise is an important risk to the inflation forecast.” If the Federal Reserve were to raise interest rates, it would exacerbate an already damaged global economy.
Statistics have shown that the prices of food and other necessities in the U.S. are growing at an alarming rate. For example, gasoline is up 1.3%, home heating oil is up 13.1%, diesel fuel has risen to 15.3%, eggs have gone up 25%; milk is up 13%; poultry has risen by 7%; and inflation is up almost 3%.
There are some experts who suggest that inflation should not be considered a bad thing, but they are quick to add that it depends on whether or not your paycheck is keeping up with inflation. Odds are it isn’t.
While some bankers assert that a slow economy may relieve the pressure for goods in demand and, in turn, decrease inflation, it is the continually soaring energy prices that are making it more difficult to control the sagging economy.
As we have already seen, hundreds of thousands of jobs are being lost as companies merge or close down. Unemployment is on the rise and we are currently in a recession which was a direct cause of inflation. The sleeping giant has awakened and it could not have come at a worse time.
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