What is Inflation?

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Inflation is a rise in the general level of prices for goods or services. Basically, inflation means that the buying power of the dollar decreases. If prices increased 5% over the past year, then something that cost you $1.00 a year ago would cost $1.05 today. That means that you are able to buy less than before with the same amount of money.

The most common cause of inflation is when demand for goods exceeds the supply available. For instance, if people have more money to spend because of changes in the economy, it means that there will be an increased demand for goods and services. However, because the same amount of goods are available, the increased demand can cause the price of those goods or services to rise.

Another factor that can cause inflation is if the government prints more money. While it may seem like the government printing more money would be an easy solution to financial hardships, it actually wouldn't help out at all. As more and more money became available, the prices of goods and services would rise higher and higher due to inflation. That means that the dollar would have less and less value the more money the government printed.

The rate of inflation varies depending upon many factors. In the 1950's the annual inflation rate was about 1-3%. In the 1970's the inflation rate jumped all the way up to 10-12%. With a 12% increase in inflation that means that the cost of something will double every 6 years!

Inflation can be very hard on people living on a fixed income. Their income remains the same from year to year while at the same time the cost of goods and services is increasing. This makes it very hard for them to have enough money to buy the things they need, and as the value of the dollar decreases they are able to buy less and less each year. This can create great financial hardship.

Inflation can also have a negative effect on banks. Say for instance that a bank gives someone a loan with 8% interest. After awhile of paying on the loan the inflation rate rises to 10%, meaning that the money the borrower is paying back to the bank has less value or buying power than the money that they originally borrowed. This is why interest rates on loans rise during times of inflation.