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The Risky Side
Inflation. Now there's a word we are beginning to hear more and more often. It's a word that sent the stock market tumbling under fears of rising interest rates. It's a word that seems to be the sole crusade of the Federal Reserve Chairman Alan Greenspan. But what does it mean to the BCD reader? First let me try to explain what it is and why it effects you. First, it is an economic change, not a change in societal values. It is simply a rise in the level of prices. but this is a very real anxiety that your standard of living will not keep pace with any drastic change in the inflation rate. You probably have noticed a change in the pump price of gasoline. If the price goes up, you pay more to drive the same distance. You have less to spend on other things. You might even change weekend or vacation plans if the price become prohibitive. Inflation is the rise of many prices. Goods from clothing to food, appliances and manufactured goods, as well as gasoline. What doesn't rise as fast or adjust as quickly is your wage. And when they do come, it is often quite a while after inflation has firmly entrenched itself. Folks on social security now have their payments indexed to inflation rates, which has reduced their anxiety somewhat. But their dollar doesn't seem to buy as much. Just ask them. If your pay doesn't increase with illation, this in essence is actually a pay cut. This "lagged wage-price ratio" can take years to readjust itself. My contract with my employer gives me a yearly pay increase of $0.35 per year which amounts to a 1.9% increase. This is almost a pay cut, because inflation is slightly out pacing the raise. If inflation suddenly accelerated. My pay would fall behind. So would yours. Robert Shiller, a famous Yale economist surveyed a bunch of folks like you and me, and found that we have kidded ourselves into thinking that a pay increase related more to job satisfaction than keeping pace with inflation. Even Alan Greenspan, the Federal Reserve Board Chairman says that inflation will weaken our judgment on how we think we are doing. The government is even slow in adjusting tax brackets so that during periods of rising inflation, we actually pay more. But even after all that, inflation, or at least some, can be a good thing. But only if you make plans to decrease debt, save consistently, and if you consume, and consumption is directly related to prices, you attempt to pay for it in cash. If you pay with plastic, pay off the balances at the end of the month. So if you are doing what you should for your future, low or slowly
rising inflation is not much of a concern. High inflation is. Too low of an inflation,
disinflation, is more of a concern. But that is another dry economics lesson.
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