Last week we discussed the Federal Reserve System, which is responsible for managing the economic health of our country. There are a number of factors the Fed must consider when creating effective monetary policy. One such factor is inflation, which is the rising of prices over time. For example, in 1911 tuition at Harvard University was $150 per year (The Value of a Dollar, p. 111). For the 2014-2015 school year, Harvard’s tuition is $43,938. The goal is for inflation to rise at a rate of 2-3% per year. Inflation means the economy is growing, so it’s not necessarily a bad thing. One task of the Federal Reserve is to ensure that the economy doesn’t grow too fast (causing hyperinflation) or too slow (causing stagnation). The Federal Reserve measures inflation by regularly looking at the Consumer Price Index (CPI) and the Producer Price Index (PPI). Inflation growth is managed by modifying interest rates.
Even though you might not like the sound of rising prices, you have to remember that your “purchasing power” is probably increasing as well. Purchasing power is “the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy” (http://www.investopedia.com/terms/p/purchasingpower.asp). Over time, salaries and wages have increased. Let’s reconsider our Harvard tuition example. In 1911, the average income for all industries was $575 per year; in 2012, the average income for all industries was $49,289 (The Value of a Dollar, p. 104 & p. 591). Prices have gone up, but so have income levels.
The following books are available for checkout at Andersen Library:
- Remembering Inflation, by Brigitte Granville. Call number: HG229 .G66 2013, Main Collection (3rd floor)
- The Value of a Dollar: Prices and Incomes in the United States, 1860-2014, by Scott Derks. Call number: HB235.U6 V35 2014, Reference Collection (2nd floor)