ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

5 Things you NEED to know about Inflation, the falling dollar and Purchasing Power

Updated on January 1, 2010

Inflation is both terrifying and very hard for the average person to understand. Most of us realize that it is a bad thing, but not exactly why it is bad or how it will affect us and our families. My goal in this article is to explain, as simply as possible, exactly what inflation is, how it affects us normal people and how you can protect yourself from it. I was going to try and cram all of this into one article but realized that it would be REALLY I have broken it up into a series... ENJOY!!!

Defining Inflation - Inflation is actually a very basic concept, it is simply a decrease in the purchasing power of a currency. That is it. To that end, the inflation rate is just the PERCENTAGE of the decrease in purchasing power. So if the inflation rate is 2% then, you are able to buy 2% less stuff with your money then you were last year OR that the stuff you buy costs 2% more, which is the same thing, just a different way of looking at it. Deflation is the opposite of inflation, it means that the price of stuff is falling and you are able to buy MORE for the same amount of money, so your money is worth MORE relatively. Over the long run it is inflation that we really need to be concerned with even though there have been periods of deflation throughout history, usually corresponding with recessions or depressions, for most of us, being able to buy MORE is a good thing.

1. Inflation is an "invisible tax"

Yep, that is correct, inflation is a tax. Though my training is in economics, I am going to try and keep this really basic and easy to understand. Inflation is caused when there is more money chasing fewer goods. There are only two ways that this situation can happen. #1 There is a shortage of goods for some reason (think a really hot toy at Christmas or a super popular car, or real estate a few years ago) since there is a shortage of the particular good that people are after, the price of that good goes up. This is the basic law of supply and demand; the price will increase until the demand finally decreases or until there is more supply. We saw this happen with oil. When the economy was good, there was so much demand for oil that the price kept increasing. When the economy imploded, so did the demand for oil and, consequently, the price of oil. Now supply issues also affected the price of oil, but all else being equal, the huge run-up in price and subsequent decrease in price corresponded with the state of the economy and the demand for the product and not with the underlying supply constraints. The exact opposite happened with oil in the 1970s when OPEC limited the SUPPLY of oil which caused the price of oil to skyrocket.

The second way for inflation to occur is when the actual supply of money in the economy increases. Imagine an economy for a make-believe country that only produces 100 potatoes per year and all of those potatoes are consumed or used every year. That is their entire economy, 100 potatos. This economy also has a money supply of exactly 100 dollars. At the most basic level the value of a country’s currency is going to be the total VALUE of the country’s economy divided by the total money supply of that country. Now we are really simplifying things to make a point but you get the idea. So then what is the value of 1 potato? Easy right, it is 100P/ $100 = $1. Ok, now imagine that the government of our fictional country decides to print another $100, so now the money supply is $200. Now what is the value of 1 Potato? It is 100P/ $200 =$2. So the price of the potato just this is great if you own potatoes as they are now worth twice as much money as they used to be...however, if you are a consumer who is buying potatoes, things just got much worse for you as the PURCHASING POWER of your money just got cut by 50%.

I mentioned above that inflation is actually a tax....can you see why this is so? Who created the extra $100? That is right; it was the government of the country. When a Government creates money they are able to spend or lend that money in the exact same way they would spend tax money they had collected. So instead of collecting $100 in taxes our fictional country's government decided that they could achieve the same thing by just printing the money instead. This is usually much easier politically as instead of raising everyone’s taxes, which most people oppose, they just print the amount of money they need and let the subsequent rise in prices across the economy take care of the rest. They have not taken your money...they have just taken the VALUE of your money by the exact percentage by which they have increased the supply of money in the economy. If the Government prints 1% more money, then your money is worth 1% less in terms of its purchasing ability. Pretty neat trick huh?

Now, I have really simplified the process in order to make a point. The reason that this little trick works so well is that, in the real world, it is far more convoluted and complex and therefore much harder to detect and understand.


Stay tuned for my Second hub in this series  "Your money really is just least these days."


Is it the duty of our government to protect the purchasing power of our money by fighting inflation?

See results


    0 of 8192 characters used
    Post Comment

    • Clarke Stevens profile image

      Will Mays 

      7 years ago from North Kingstown, RI, United States

      A little inflation every year is thought to be normal for a healthy economy. It's a sign that people are expecting growth and are willing to spend a little more ahead of the growth. The tricky part about discussing inflation is that we usually state it in terms of our currency. Prices can seem like they're rising, but if the currency is falling, real prices can be actually falling. And that would be deflation.

      Thanks for writing about economics so a regular person can understand, OregonWino. Good hub!

    • profile image


      8 years ago

      When do we get the next installment?

      Good write up by the way.

    • OregonWino profile imageAUTHOR


      8 years ago

      I wanted to thank you for the great comment! I know that this is a very basic overview but I really wanted to try and make it basic so that people without a background in this could understand it.

    • salt profile image


      8 years ago from australia

      I applaud you!! Very good, a little simplistic, but a good point. I may do something on the velocity of money. The world of the finance graduate and the rest of us - as a side issue what ethical standards are applied to the finance industry to protect those who dont have a doctorate in mathematics. If ethics had existed, maybe there wouldnt have been a subprime market to fold at all. How an economist thinks and how this may not include variables that might be relevant. Like environment. If you add the current environmental issues to any economic equation, you might come up with different answers than things like grain from Monsanto.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)