Most people know what inflation is without having taking any courses on the topic. They see general level of prices for goods and services increasing over time whenever they visit a store or shop online. As they pull dollars from their wallet, they notice that this money purchases fewer goods and services than it did just a few years ago.
When the money supply grows excessively, high inflation rates follow. A long period of sustained inflation results when the money supply grows faster than the rate of economic growth. With the desire of the Fed to print more money to get the country out of recession, the likely result is increased inflation. Thankfully, favorable food prices and a stable environment for exchange rates have served as an inflationary buffer this year.
Inflation has multiple effects on the economy, both good and bad. The bad is the decrease in the real value of money and monetary items. Savings and investments may also be reduced due to people being uncertain regarding future inflation. If even higher inflation is predicted, people may begin hoarding goods and services, leading to a shortage in goods.
The positive effects of inflation include getting the economy out of a recession. Those who are in debt experience relief in the form of a reduction in the real level of debt when inflation hits. They can repay money that is worth less than it was when they borrowed it.
In general, economists promote a steady rate of low inflation. Low inflation plays a role in making an economic recession less severe. Central banks control the size of the money supply by establishing banking reserve requirements, setting interest rates, and through their open market operations. We look to these actions by central banks to maintain a low and stable interest rate.