Inflation The term inflation, originally referred to monetary inflation, or simply said increasing of the money supply in certain country. However for most people the term inflation, means price inflation, or increase in the price for goods and services. The monetary inflation, which is increase in the money supply, debases the currency and makes every dollar worth less today, compared to yesterday. Because of this inflation is frequently called “silent tax”. In its core inflation is simply an unfair tax imposed on savers. If you save $5,000 dollars this year, and the rate of inflation is 5% per year, your $5,000 will buy 5% less goods and services next year. Fiat money, do not have any intrinsic value and are simply backed by a government promise. Because fiat currencies are not backed by gold or other commodity, governments can in effect print money (increase the money supply) as much as they see fit. The governments then spend the money on countless useless programs and initiatives, and the new money find their way into the country’s economy. The net effect of this is that more money are chasing the same amounts of goods and services, causing the price of everything to go up (price inflation). When the government prints too much currency in order to finance spending programs, the dollar becomes less valuable because of the basic law of supply and demand. In an inflationary environment, consumers will be forced to pay higher prices for the goods and services they purchase. Inflation is a two edged sword. There are both good and bad aspects of inflation. First the positive: Inflation can be a signal that an economy is heating up. Businesses are doing more business. More natural resources are needed and more people are working. The retired and those living on a fixed income may benefit in times of inflation. Interest rates for CD's and other interest bearing accounts will rise with the rise in inflation. The Cost of Living Adjustment (COLA) will add to the monthly Welfare check. On the negative side, too much inflation will cause a decrease in the value of the dollar. When you go to the grocery store, instead of the usual hundred dollars you spend each week, you may wind up paying one hundred fifty dollars for the same amount of groceries. That might be a bit extreme as inflation is a more gradual process. It does not happen overnight, but, over an extended period of time. If your income does not increase at the rate of inflation or greater, your purchasing power will decrease and logically, your standard of living will drop. The Bank of Canada plays an important role in controlling inflation. Tightening or loosening the money supply by adjusting interest rates can either trigger inflation or keep it under control. They must balance the growth of the economy against the risk of too much inflation. There have been times of both high and low inflation. Today is a good example of a low inflation environment. This is directly related to the downturn in our economy. Coming out of a recession, inflation tends to be very low. Home foreclosures, job losses and the increase in personal debt all contribute to a recessionary economy. They also serve to keep inflation low. Low inflation keeps prices down. It also makes investing in the stock market an attractive alternative to sticking your money in a low interest rate bank account. So what do you want? Low inflation? High inflation? The best scenario for most Canadians is a moderate amount of inflation that will indicate the economy is growing steadily, but not out of control.