> Bob Bergantino,RPT>> > > I thought inflation was the result of excess paper money which devalues the > currency unit. What I stated was rising costs, which someone eventually has > to pay. With stuff we buy, we pay the extra cost. For example, if a widget > costs the mfg $1 to make as of today, but costs $1.25 to make tomorrow due > to fuel cost increase, the mfg will not absorb the cost, but will pass that > on to what is eventually the consumer. Unless I am badly mistaken, that is > not inflation. Inflation is a product of supply side economics. All economies require inflation for growth. An inflationary rate between 2 1/2 and 3 percent is considered healthy. An economy with a zero or negative inflationary rate is a bad thing, as this indicates zero or negative growth. A rise in the inflationary rate occurs when the demand for products exceeds manufacturers abilities to produce. Therefore the price of manufactured goods increases. In our current situation the economy has become too "hot". There are too many people with too much money to spend because we have experienced rapid widespread growth. What is worse people have been spending excessively on credit. Unemployment is exceptionally low. This is a bad thing because there are more jobs than there are people to fill them, particularly skilled jobs. Employers must pay workers more in order to hire and keep them. Factories must pay overtime to keep up with the demand of buyers. Once runaway inflation starts, (as experienced in the 1970s), it is very difficult to contain. The only known cure for inflation is the regulation of interest rates. If interest rates are raised fewer people will purchase goods, durable goods in particular which require financing. If money becomes too expensive to borrow then things such as home and auto sales drop. Demand falls, unemployment increases, and the inflation returns to safe levels. This of course is why interest rates have gone up so dramatically in the past year. The Federal Reserve Board raises rates to head off inflation. The opposite is true for a sluggish economy in which rates may be lowered to give the market a jump-start. Fuel prices can also contribute to inflation since it is a critical product which involves the entire economy. Because OPEC has cut back production the price of oil has gone up dramatically. The increase then trickles down into all other industry and suppliers who depend on oil and fuel. Thank you for attending Rob's economics class. Grades will be posted. Rob Goodale, RPT Las Vegas, NV
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