How much money does it take today to buy a gallon of gas that cost $1.25 yesterday? If the answer is $2.00, you have inflation.
Inflation means an increase the general level of prices. The conditions leading to rising prices are many and varied. For example, supply and demand can be one cause. Let’s say oil production falls, but demand remains the same. The price goes up.
The impact on you: The cost per gallon of gasoline rises. That leaves you with less money for buying other goods or for saving.
A plus: Industry might develop new technology for finding more energy efficient fuels at lower prices.
Government spending can also be an inflationary factor. When deficits outpace the money supply, the Federal Reserve Bank could try to compensate by printing more money. Additional money in circulation can overbalance economic growth by reducing purchasing power, which leads to inflation. The Fed may attempt to head off the inflation by raising interest rates.
The impact on you: Higher interest rates lead to higher borrowing costs. Major purchases such as a new home or car could be out of reach.
A plus: If you own fixed-income investments, such as certificates of deposit or Treasury securities, a rising interest rate may increase your income.