Where is Inflation Heading….

Dec. 15, 2010 - PRLog -- Andover, Massachusetts December 15th, 2010 –  Inflation has been a topic of concern for policy makers and economists nationwide since the economic collapse occurred in late 2008. Before analyzing where inflation could be heading, let’s take a look at what inflation is and what causes it. Inflation is a rise in consumer prices, so if a certain TV costs $500 this year and was $450 last year, then there is inflation occurring. A strong and vibrant economy has inflation, when consumer prices are not rising it means there is no economic growth that would cause demand to increase and thus prices to increase. Inflation that is too great however can severely harm the economy, while a state of falling prices, deflation, can also mean bad news for the economy.

The latest figures released by the government indicate that prices continue to rise, but at a very slow pace. The Federal Reserve has stated that it would like to see inflation approach 2% in the near future and then hold steady, as this would be ideal for future economic growth. Over the past 12 months ending in November, the Consumer Price Index, one of many measures of inflation being tracked by the government, increased 1.1%. This index includes everyday items including food and energy related goods. Excluding these two volatile features, the core CPI only rose .8% over the past year. Remember, if prices don’t rise, it means that demand is lacking and the economy is heading in the wrong direction. While a .8% increase is better than deflation, it still signals that there is a chance that deflation could be in our future. While recent news reports have said that policy moves being made by the Fed will lead to rapid inflation, respected economists nationwide insist that the real threat in the near term to our economic health is deflation. If prices were to decline for an extended period of time, consumers would put off purchases while prices fall to get the best deal. This drop in demand would affect business and increase unemployment. With more people out of work and not making any money, demand would continue to fall and a vicious cycle would begin. This is what Japan has been battling for the better part of 20 years and is a scenario that the US government wants to avoid at all costs. Due to this, the recently announced policy of Quantitative Easing, or treasury purchases by the Fed to increase the money supply, should lead to an increase in inflation. The question remains however, at what point will the Fed decide to lower the money supply to contain inflation and will it be too late by then?

Readers, this is an extremely interesting and complex topic. Where do you stand on it? Do you see prices rising in your neighborhood while your paycheck remains the same?

Preferred Financial Services is a debt reduction firm certified by the CFC (Center for Financial Certifications) and accredited by U.S.O.B.A. (United States Organizations for Bankruptcy Alternatives). Headquartered in Andover, Massachusetts, Preferred Financial Services has been a leader in the debt reduction industry since 2003. Preferred Financial Services has acquired some of the best experience in the industry over the past 7 years. In 2009 alone Preferred Financial Services reduced over $16.5 million worth of consumer debt for just $6.4 million, for a savings of about 60%- and over 2,900 accounts were settled on behalf of their clients.

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