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Inflation And What It Does To Your Money

There's some good news, and some bad news (regardless of whether or not you have your own home base business idea):

After enjoying an extended period of relatively low inflation, a number of well respected commentators are now declaring that inlation is officially "dead".

 It may be, however, as Mark Twain said after hearing that his obituary had been published in the New York Journal - "The reports of my death are greatly exaggerated".

As you'll see from the graph in the link to the University of Oregon, Inflation has been around in different guises since the beginning of time.

And whilst it seems to have "gone away" for the present, there is little doubt that it will be back at some time in the future.

Inflation, like so many things, seems to be cyclical.

Is Inflation Good Or Bad For Us?

There's no easy answer to that one I'm afraid.

I'm no economist so it's difficult to give a definitive answer (and, cynic that I am, I doubt if even economists could give a definitive answer - they can never seem to agree about anything), but I suppose the answer lies in the phrase:

"It's good for you and it's bad for you - all at the same time...

"Remember when $25, 000 was a success? Now it is a garbage collector."

Frank Dane

It depends who you are and what you want out of inflation"

For example...

As low inflation invariably means low interest rates, then if you're a home owner with a mortage (or in business with large loans outstanding) - then low inflation is obviously good for you.

Generally speaking, low(ish) inflation is good for the majority of people and the country as a whole.

Although there are exceptions (aren't there always?)...

If inflation is low and interest rates are low then savers automatically suffer, although as we've just seen - mortgage payers and businesses with loans benefit.

In the United States where inflation is currently at about 1.7%, ING (the international banking group) is offering an "excellent" (their words not mine) deposit rate of just 2%.

You can see their advertisement by clicking on the first link below.

And if you want some serious bedtime reading, read the second link about good and bad inflation (they're trying to get you to invest in gold - but don't worry too much about that).

ING Bank is offering an "excellent" 2% per year

Good and Bad Inflation

Simply put, this means that if inflation is 1.7% and the best you can get for your money "on deposit" is 2%, after you've paid tax on your interest income your money is actually losing it's value by sitting in the bank!

So, whilst low inflation is generally thought to be "good";

If you're a saver or anyone who relies on their savings interest - low inflation is maybe "not so good".

"The best way to destroy the capitalist system is to debauch the currency.

By a continuing process of INFLATION governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

John Maynard Keynes. (Economist 1883-1946)

Conversely, if you're in business then low inflation is also sometimes "not so good".

Businesses actually need to be able to raise prices to enable them to make extra profits which enables them to take on more staff, to pay extra wages, to service loans, to meet increased costs etc etc.

In periods of low inflation, if they can't raise prices (or worse) they have to lower prices just to make sales - if their costs are rising then that is not good for business nor the economy generally.

It's possibly good in the short term for consumers (welcome to the age of the "perma-sale"), but long term may be a different matter.

And if prices start being lowered too much that will have a knock on effect on inflation;

And the rate of inflation may become lower still which then changes inflation into the dreaded "deflation".

Complicated?

You bet it is.

Economists train for years to understand and analyse all this and yet if you put 6 of them in the same room, they'd probably produce 7 different sets of figures and ideas.

And as I'm no economist and I definitely haven't trained for years, do I know what I'm talking about?

Probably not!

But it's interesting, isn't it?

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