Value Of Money
Value of Money helps measure the relative worth of the U.S. dollar and how much it can buy.
- Inflation: Inflation is an increase in the price level of goods and services which causes the value of money to decline. Inflation has a direct impact on people, companies and your investments. For example, if you had a bond with a 5% interest rate, and because of inflation, interest rates are now 7%, your bond is worth less than when you purchased it. If interest rates rise 2% and you only get a 1% increase in your pay check, you won’t be able to afford to buy as much as you used to. Because of rising prices, consumers reduce their purchases. Too much inflation can hurt the economy. The Federal Reserve Board periodically adjusts interest rates in hopes of slowing down inflation.
- Deflation: Deflation is the exact opposite. It is the reduction of consumer and wholesale prices. Generally this term is used to indicate a temporary decline. During deflation your purchasing power goes up because the cost of goods goes down. This occurs when there is excess competition or lack of demand. Just as companies can be hurt by inflation, they can also be badly hurt by deflation.
- Disinflation: Disinflation is a slowdown of the rate of inflation. For example, maybe the rate of inflation was 4% one year and 3% the next. Generally this is viewed as a positive investment environment. However, some companies which have borrowed money or made other business decisions expecting interest rates to rise might be hurt during a disinflation period.