The federal government’s inflation figures, as measured by the Consumer Price Index, invariably underestimate the real costs to ordinary people. The effects of rising prices, the most easily understood definition of inflation, are widely felt.
The higher inflation is, the less your money will buy in goods and services. If your income does not grow commensurate with, or beyond, inflation, it is a tax on your income.
When inflation exceeds the interest earned on your savings and investments, your net worth loses value. Inflation gnaws away, and often swallows whole, interest earned on fixed-priced assets, such as bonds.
Inflation is an enemy of people on fixed incomes and those employed in jobs without cost-of-living raises. Price increases plus income stagnation equals less purchasing power.
Borrowers Versus Lenders
Inflation benefits recipients of fixed-rate loans, such as mortgages. As inflation eats away at your monthly premium's value, you pay a lesser real amount with the passage of time.
As consumers adjust their spending priorities to compensate for inflation-ravaged purchasing power, businesses across a wide spectrum of the economy are adversely impacted. The end result is fewer jobs and higher unemployment.
Massive inflation in the areas of health care and higher education often make them inaccessible. Individuals make cost-based decisions that reverberate for many years to come, even lifetimes.
Nicholas Nigro has more than fifteen years as a professional writer. He is the author of several books, including "The Everything Coaching and Mentoring Book," "101 Best Businesses for Pet Lovers," and "No Job? No Prob!" Nigro holds a Bachelor of Science degree in economics from Manhattan College.