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Small time guy -> RE: High Fuel Costs !!! (5/12/2008 9:55:50 AM)
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I'll bite. Inflation is the rate of devaluation of a currency. It measures the buying power of a currency over time.
That said, inflation is not necessarily a bad thing. It is the natural process of economic growth. During an economic expansion, there is natural pressure for industrial growth, which typically leads to lower unemployment (recent productivity gains have allowed greater growth without the need for higher labor spending, but since the capital outlays remain relatively constant for the business, it's a moot point) as businesses spend more to produce more to keep up with demand. Thus, more people have money, consumer demand increases, and the growth process feeds on itself. The brakes on this process are workers themselves. Businesses will continue to grow to meet demand until it becomes necessary to raise wages to the level of attracting workers that do not want to work. Essentially, labor supply is exhausted and the price of labor increases. Suddenly, goods cost more, spending decreases, demand decreases, and before you know it, there are layoffs because inventory isn't moving anymore. It cascades on itself until a new equilibrium is found, and growth starts again.
This is overly simplistic, because in reality there are many more pressures on economic growth than just labor, namely monetary policy, exchange rate policy, government spending, and taxation laws, to name some of the biggest culprits. However, the same rules are still in place. Inflation occurs when it is necessary to pay more to produce goods, and then the natural passing of those costs to the consumers. It's in lock step with the interest rate, which is the cost of holding money. Think of it this way. A dollar today will not buy all that it did in 1930. But, there are so many more dollars today due to economic growth that it's not that noticable unless your only focus is on the dollar's buying power.
Geez... You just wanted a simple definition, not a lecture. Thank God I didn't take time to try to load up some graphs... :)
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