Prognosis: Inflation

Inflation is defined as an increase in prices that reduces the purchasing power of the unit of currency, the dollar, in this case. As inflation increases, a dollar buys less and less.

Inflation is created by a number of factors. Supply shortages or increased demands for a fixed amount of product create rising prices. Increasing oil prices can fuel inflation as well as our cars. Increasing food prices can feed inflation.

We should not forget that the government can print more dollars, diluting the value of each individual dollar. The money supply is a very important part of the development of inflation.

Americans haven't had to worry about inflation for a generation. The delicate balance between prices and production and money supply has been maintained and we have seen a long period with little or no inflation.

You and I know that is not true. Gasoline prices are double what they were a decade ago. Potato chips cost 33% more than they did six years ago. The cost of electricity has gone up 30% in six years. Ground beef now costs 50% more than it did in 2000. The cost of a dozen eggs is up 50% in the last six years. Prices have been going up.

The U.S. government measures inflation through the Consumer Price Index. They report the monthly changes in price of a number of goods and services, and also adjust for seasonal changes. The CPI base index is considered to be 100, and is currently set in the early 1980's. All index data since then is in comparison to the original index value of 100.

According to the Bureau of Labor Statistics, in January 2005, the CPI read 190.7. In December 2010 it read 218.6. That's about a 14.6% increase in the overall market basket that the government uses. In that same period, the CPI for food and beverages went up 16%, medical care went up 23%, transportation went up 18.6% and housing costs went up 12.9%.

Your increase in costs from 2005 to 2010 depended upon what you bought. Unless you bought the exact mix that goes into the CPI, you saw a different CPI, your personal CPI. If you are like me, your personal CPI went up a whole lot more than the government's CPI.

The CPI inflation calculator shows that $100 in 2001 bought the same amount of goods and services as $123.13 in 2010. Turning it around, $100 in 2010 had the equivalent purchasing power as $81.22 did a decade earlier.

Where are we headed?

Inflation. The money supply in the United States increased 10.3% from January 2010 to January 2011, and 15.6% from October 2010 to January 2011. Our production of goods and services, Gross Domestic Product, rose 2.9% in 2010 after falling 2.6% in 2009. The percentage increase in the money supply in 2010 out stripped our national production 350%. That's what I call diluting the value of the dollar.

Inflation. The UN's Food and Agriculture Organization has recorded the highest world food price index in January 2010 since 1990. As they measure commodity prices in the world market, sugar prices have gone up 12% in the last year, cereal grains 44%, meat 19% and so on.

Inflation.Gasoline prices are up nationally 48 cents from a year ago as of February 7. That's an 18% increase.

It's time to dig out your "Whip Inflation Now" buttons.

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