Kitchen Table Economics

The Dangers of Inflation

The most recent federal government data reveals that year-over-year inflation in August hit 5.3 percent. Inflation is a measure of how much consumer prices rise over time. There’s a reason why your grandparents could purchase a hamburger for a nickel but now it costs you several bucks.

Currently, the U.S. is experiencing the quickest pace of inflation since 2008. But what does that mean for you?

Well, as the cost of goods and services rise, the value of the dollar drops. That means the same amount of money can buy less and less. For example, while consumer prices rose by more than 5 percent over the past year, average hourly earnings only jumped by 4.3 percent. The difference amounts to a pay cut for consumers.

The financial black hole hits individuals and small businesses alike. And as prices at the grocery store rise, budgets tighten. But the real danger posed by inflation is once it gains momentum, it’s difficult to stop. Inflation simply creates more inflation.

As Americans feel the inflationary pay cut and expect it to continue, buying habits will shift. Consumers will purchase goods today to avoid higher prices tomorrow. As demand jumps, prices will rise further. An inflationary feedback loop will subsequently ensue.

Current price increases are hitting Main Street hard. Hopefully the Federal Reserve and our elected leaders will take the threat seriously. The value of your bank account depends on it.