Inflation, at one point or another, has been something every American has had to deal with for a number of years. Simply put, inflation is when the general price of goods and services goes up across the economy, reducing the purchasing power of a currency and the value of certain assets. Your same paychecks suddenly become worth less than they used to even though the monetary value might stay the same. This is sometimes referred to as a “hidden tax”, as well.
What causes inflation?
The most straightforward way this can occur is when policymakers put more money into the economy, through either deficit-financed government spending or Federal Reserve action. Alternatively, it could occur because of a decline in the output of real goods and services. Another factor is how often a dollar is being used to purchase goods and services in a given time period. If everyone is leaving less money in the bank, that ultimately means there is more money available for the same goods and services.
Is Inflation a Bad Thing?
For obvious reasons, inflation is always seen in a negative light because it is raising the price of everyday goods and services. However, economists generally think stable, low, and predictable inflation is ideal. The Federal Reserve likes to target around 2 percent per year. Sometimes it exceeds that number and when that happens it can harm the economy, as well as its consumers and lenders.
It does take time for the economy to adjust to increasing or unexpected levels of inflation, prices or consumer goods typically adjust a lot faster than wages. A result of this means real incomes lose value even if the monetary value of the paycheck stays the same because everything you purchase costs more than it used to.
Inflation and taxes
Inflation, which sometimes is referred to as a “hidden tax”, can also have an actual effect on taxes. It can push taxpayers into higher income brackets or reduce the value of tax credits, deductions, and exemptions. This is known as bracket creep, which results in an increase in income taxes without an increase in real income.
Wrap up
Inflation is, and will always be a part of our lives. It is always important to keep up with the inflation news to help plan your budgeting and everyday spending. If you ever need financial assistance or have questions, it could be a great idea to call a trusted financial expert to point you in the right direction.