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How Does Inflation Affect You?

how does deflation work

When people go the the grocery store and see ever higher prices they know how inflation affects them. But when they are feeling more philosophical they might reason that if all wages and prices increased at the same rate it would all balance out in the end right?

Well theoretically yes but in reality it never works that way. Prices of various items all increase at different rates so some people are benefiting while others suffer. Those on fixed incomes suffer the most because the cost of things they are buying increases but their income stays the same.

This is where COLA or “Cost Of Living Allowance” comes in it is an adjustment that is made to compensate for the increase in prices due to inflation.

But even if costs are adjusted they are adjusted after the fact so that you have already been paying the higher prices for a year before your income is adjusted.

One side of inflation that most consumers appreciate is the fact that they can pay off their debts

with “cheaper dollars”.  So as you borrow the value of the money you borrowed goes down so it takes fewer hours of work to pay back the lender.

This is one reason why debt is so prevalent today. Unfortunately, this is a subtle but insidious poison because it trains us to feel good about cheating others. In the past a man’s honor was tied to his ability to repay his debts but today inflation has taught us that it is good to try to cheat lenders out of their due. This has led to a higher rate of bankruptcies and if the trend continues it could lead to the breakdown of commerce.

Once lenders can’t be assured of getting repaid they will stop lending (or have to charge exorbitant interest rates) and as interest rates increase the economy grinds to a halt. So even the “good” side of inflation is really “bad” for the economy in the long run.

About Tim McMahon

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Category: Bank

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