The Problem of Inflation

As food prices continue to rise, as gas prices balloon off the charts, and with more than 80 percent of Americans of the mind that we are indeed in a recession, one clear-cut fact looms ominously and undeniably: that we can no longer turn a blind eye and deaf ear to inflation.

What causes inflation? According to one source, inflation is brought about when the money supply exceeds the value of goods produced. Combine this with the fact that as the supply of money increases the value of that money inherently decreases. Sufficiently confused? You're not alone. Certainly, this catch-22 sounds a bit crazy, but therein lies the problem.

Let's expand that second notion a bit further. When the money supply is increased, then people naturally have to spend more for goods. This has to do with the fact that the larger money pool generated by the government results in a decrease in the value of each dollar. This essentially means that the companies that provide goods must raise the prices of those goods in order to maintain an acceptable profit margin. Furthermore, as the value of the dollar (or any country's currency, for that matter) begins to deteriorate, it then costs more of that currency to import necessary goods, which also boosts inflation.

Just after the beginning of the sub-prime mortgage fiasco, the Federal Reserve began cutting interest rates, thus enabling more money to enter the financial system. Although this was thought to be a short-term remedy for a long-term problem, it invariably posed another problem: too much money decreased the value of the dollar, and inflation woke up. The average American has seen prices skyrocket at a rate not experienced in decades. Meanwhile, the Fed finds itself continually facing a most precarious strategic decision. It could continue to cut interest rates and pump more money into the economy, thereby furthering the decline of the already sinking dollar and fueling the inflation fire. Or it could raise rates and thereby possibly precipitate a "cash crunch," when prices for goods are already high.

Statistics have shown that the prices of food and other necessities in the U.S. are growing at an unprecedented rate. For example, home heating oil is up over 13 percent and diesel fuel over 15 percent. Eggs have gone up 25 percent and milk more than 13 percent, and poultry has risen by 7 percent. Those few cases, of course, aren't the whole story; the cost of living is rising alarmingly across the board. Yet, there are some experts who suggest that inflation should not be considered a totally bad thing, but they're quick to add that it largely depends on whether one's individual paycheck is keeping up with the rise in prices. (Odds are that it isn't.) Indeed, some bankers assert that a slower economy may relieve the pressure for goods in demand and, in turn, decrease the rate of inflation.

As we, unfortunately, continue to witness, thousands of jobs are being lost as companies merge or close down. Unemployment is on the rise—more unmistakable evidence and a standard by-product of recession. Indeed, we're in the grip of staggering inflation along with its effects, and it could not have come at a worse time.