Is Inflation Dangerous·

Posted By: Dr. Frugal in Saving on 09/22/2007 at 13:04:50

Is all inflation bad· If you ask an economist that question, you'll get a typical economist answer: it depends. If you define inflation as a general rise in the price of goods and services, there is often a corresponding rise in wages. The children of baby boomers who are graduating from college and entering the job market are often getting salaries their parents worked years to reach (like me!).

In a growing economy, prices and wages will rise at approximately the same rate thanks in part to inflation. It doesn't always work that way, though. Not all business may be able to raise prices due to competitive pressures and their profits will likely suffer because of the increased costs. Their employees won't be getting big raises as the company tries to hold down expenses.

People who invest in fixed income products like bank CDs and bonds can suffer because inflation will make their interest income worth less. In addition, one of the cures for inflation is higher interest rates, so fixed income investors may have their money tied up in products that pay a lower than prevailing interest rate.

It doesn't take complicated math to see how inflation can devastate your savings. For example, if you have a bank CD that pays 5% and the inflation is 4% each yera, what you really netting· Not much.


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