The Joys of Inflation: What Inflation Really Means

You may have heard about a term called inflation before, but many people lack full understanding of this term and what it implies. Inflation is an economic term for when money becomes worth less, and coincidentally the price of goods goes up.

Monetary inflation refers to money being worth less than it used to be. After monetary inflation occurs, businesses will increase their prices as a reflection of the new, slightly less valuable dollar. They are not increasing the markup to be greedy; they are simply representing their newly found costs. Deflation is caused when the value of money increases. Theoretically deflation should cause also cause monetary deflation, but this is rarely the case.

Over time inflation naturally occurs as more people are born and become consumers. Disinflation refers to a drop in the standard rate of inflation. The rate of inflation is normally measured by the Consumer Price Index (CPI). This index measures the average price of consumer goods and therefore monetary inflation. How can money becoming worth less actually be good for consumers?

The average, middle class American should be happy to see a small amount of inflation. This is because the average middle class American has a greater benefit from inflation, than the do a loss. Let's take a look at why. When inflation incurs money become worth less, in the same manor debt also becomes worse less. The average Americans largest asset is their house, and a house is traditionally purchased with a mortgage. That's right mortgage payment rates don't fluctuate with inflation. If inflation occurs, and you own money on a mortgage, then you should smile because the higher price of consumer goods will be completely eclipsed by the money "saved" through your mortgage. What other things don't fluctuate with inflation?

Just as your mortgage doesn't fluctuate with mortgage rates, your salary will probably be static as well. Not entirely static, but it will definitely lag a few years behind inflation. This allows inflation to let consumers definitely feel an inflation "pinch". Now that we understand the basics of inflation, and it's effects, lets take a quick look at other terms related to inflation.

Hyperinflation generally refers to extreme amounts of inflation. This has occurred in Germany, and many third world countries. It generally happens when government oversight is not properly taken when money is being printed. The government simply prints more money to finance more government projects. This results in people having to carry around wheelbarrows worth of money in order to buy groceries. With all of that being said, it is important to remember that a little inflation is a good thing and part of a healthy economy, whereas a lot of inflation is a bad thing, and can spell disaster for a nation.