As inflation increases, then the value of a dollar is worth less. It’s nearly universally agreed that too much or too little inflation is bad. Is Inflation Good or Bad?Īs to whether inflation is good or bad depends on the increase amount. If the $2 item originally cost $1, then the CPI would be 200, as it’s 200% the original price. This number is usually measured with a CPI or Consumer Price Index, which measures the relative price of something. With this dramatic scenario, a $1 item might be sold for $2 now, or it might slowly increase in price over time, to make up for inflation. Since a dollar can only buy $0.50 worth of a product now, then sellers might increase their prices to make up for the loss in value. In this extreme example, a dollar bill would be valued at $0.50. As there are more physical bills out in the world, but the value hasn’t increased, then a dollar would be worth half as much. If the government decided to print out $1 trillion more to cover expenses, then there would be $2 trillion bills in circulation. At this base value, a dollar is worth $1. Let’s say the United States had $1 trillion in bills in circulation around the world. Companies selling products, such as Coca-Cola in the previous example, will increase their prices to cover the drop in value. As this happens the value of currency, or the US dollar, falls and the bill is worth less. It’s important to remember that money doesn’t increase, but the number of bills does. Inflation happens when a reserve, in this scenario, the United States’ Federal Reserve, increases the amount of bills in circulation. Alongside the United States’ increase in the amount of bills in circulation to pay for infrastructure, bills, and other expenses, prices across the country have increased. For example, up until 1959 you would have been able to buy a bottle Coca-Cola for $0.05. ![]() There are certain situations where inflation may be negative (known as deflation), although with nearly 100 years of measuring purchasing power, inflation has continued onwards.Īs prices rise and money’s value falls, the amount that a dollar can buy decreases. While in one year a $1 bill may go down in value of about $0.02, over 50 years it may go down by $0.64. Over the years, these inflation percentages add up. While it’s not guaranteed, inflation typically happens consistently at roughly 2% per year. With inflation, prices of goods and services rise as money becomes worth less. Inflation is a decrease in purchasing power over time.
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