Inflation

At its simplest, Inflation is a rise in prices or a decrease in the purchasing power of money. While individual item prices may sometimes climb due to shortages or increased demand, inflation is generally measured across a wide range of goods and services.

This increase or decrease in prices across this range is expressed as a percentage point. For example, since 1960, inflation has increased by an average of 3.79% per year. That means prices today are about ten times higher than they were back then. What $1 could buy in 1960 now requires $10.

Inflation by itself isn’t necessarily a bad thing. If you own property or commodities, some level of inflation means that your assets are increasing in value. If you have a fixed-rate loan, inflation means you are paying the same amount of money each month while getting a higher value for it.

Inflation can also stimulate the economy by encouraging higher rates of spending. Investors may seek higher gains than those yielded by inflation, while consumers may choose to spend now rather than later due to concerns over rising prices. On the downside, inflation increases the cost of goods and services, and any money that is not invested in a high-yield savings vehicle loses value over time. Wages may not keep pace with inflation, leading to further decreases in purchasing power. If left unchecked, inflation could skyrocket to the point where money essentially becomes worthless.

The Federal Reserve, or the Fed, is responsible for controlling inflation. It typically does this by adjusting interest rates. If inflation is low, the Fed lowers interest rates to encourage spending. If inflation is high, it raises interest rates to slow down the economy. However, raising interest rates too high or too quickly can lead to a recession. In general, the Fed aims to maintain inflation at an average of 2%, which is considered just high enough to support economic growth while keeping prices stable. If you’d like to learn more about the Federal Reserve and how it operates, visit their website at [federalreserve.gov](https://www.federalreserve.gov).