All About Inflation

My grandpa used to tell me that when he was a kid he could buy a candy bar for a nickel. In the U.S. just before World War II, a loaf of bread cost $0.15, a new car could be bought for less than $1,000, and the average house price was around $5,000. Today, bread, cars, houses and just about everything else cost a lot more. When the general price levels in a country rise, it is called inflation – and clearly, we've experienced a significant amount of inflation over the past century.

Contrary to popular belief, inflation is not a modern phenomenon. In fact, societies have been dealing with inflation for millennia. Records from ancient Rome indicate that the cost of a standard military uniform rose over time. Inflation struck often during Medieval Europe, and hit Spain particularly hard during the 1600’s. The 1900’s saw hyperinflation in Europe, Africa, and South America, where price levels skyrocketed, doubling sometimes over the course of weeks or even days.

Over the past decade or so, inflation has remained quite low, below 2% on an annual basis in much of the developed world. However, when inflation surged to double-digit levels in the mid- to late-1970’s, Americans declared it public enemy No.1. Public anxiety over inflation has since abated, but people still remain wary of rising prices, even at the minimal levels we've seen over the past few years. Although it's become common knowledge that prices go up over time, most people doesn't understand the forces behind inflation, who benefits and who loses from inflation, and what can be done to protect yourself from the economic harm it might cause you.

This tutorial will shed some light on these questions and consider other aspects of inflation.