INFILATION

Inflation is when the prices of most goods and services continue to creep upward
. It is measured by the Consumer Price Index (CPI). Check out the current inflat
ion rate.
Inflation can affect different parts of the economy at different times. For exam
ple, oil prices move up and down rapidly, because they are driven by the bids on
the price of oil futures contracts. As a result, gas prices are also very volat
ile. This can drive up the price of food, which is usually transported long dist
ances. For this reason, the price of food and energy is left out of the core inf
lation rate. This is used by the Federal Reserve as a better indicator of true i
nflation.
Inflation can also affect just one or two parts of the economy. For example, hou
sing prices were bid up, reaching a peak in 2006. This is known as asset inflati
on, because it affected one asset class. Asset inflation also occurred with stoc
k portfolios, when the Dow reached its peak of 14,164.43 on October 9, 2007.
Inflation is usually a result of overheated economic growth, sometimes caused by
irrational exuberance. It is also caused by a glut of capital in the market cha
sing too few opportunities. This happens when there is too much liquidity, which
is excess dollars or credit.
Price inflation usually leads to wage inflation, so that companies can retain go
od workers. Unfortunately, the wages creep up more slowly than do the prices, be
cause companies are reluctant to increase these fixed costs. Higher prices combi
ned with stagnant wages means your standard of living can actually decrease. Thi
s contributed to increasing income inequality in the U.S
Q How Does Inflation Impact my Life?
A Inflation always hurts your standard of living. Rising prices means you have
to pay more for the same goods and services. If your income increases at a slow
er rate as inflation, your standard of living declines even if you are making mo
re. Inflation's main consequence is a subtle reduction in your standard of livin
g.
Inflation doesn't affect everything equally. Gas prices can double while your ho
me loses value. This makes financial planning more difficult.
Inflation is really bad for your retirement planning because your target has to
keep getting higher and higher to pay for the same quality of life. In other wor
ds, your savings will buy less. As a result, you will need to save more today to
pay for higher priced goods and services in the future. Since everything you bu
y today costs more, so you have less left-over income available to save.
Inflation has another bad side-effect...once people start to expect inflation, t
hey will spend now rather than later. That's because they know things will only
cost more later. This consumer spending heats up the economy even more, leading
to further inflation. This situation is known as spiraling inflation because it
spirals out of control.
Inflation is important if you are holding bonds or Treasury notes. These fixed p
rice assets only give a fixed return each year. As inflation spirals faster than
the return on these assets, they become less valuable. As they become less valu
able, people rush to sell them, further depreciating their value. As their value
becomes lower, the U.S. government is forced to offer higher interest rates to
sell them at all. This increases mortgage interest rates
CONCULUSION
From various Monetary, Fiscal and other measures it becomes clear that to contro
l inflation. Government should adopt all measures steps.