Inflation is the ongoing change in value of a countries currency. As the FederalReserve allows more cash to be printed the value of that money is lowered. Think of itthis way; you divide a pizza into eight slices to feed your friends, suddenly four morebuddies arrive so you get the cutter out and slice the pie into a total of twelve pieces.Now you still have the same amount of pizza but each piece is not as filling as before.The same works with currency; as more money is printed and placed into circulationthen it is not worth as much and has less buying power. Representative Ron Paul hadthis to say about the Federal Reserve and inflation “Printing money, which is literallyinflation, is nothing more than a sinister and evil form of hidden taxation. It’s unfair anddeceptive, and accordingly strongly opposed by the authors of the Constitution. That iswhy there is no authority for Congress, the Federal Reserve, or the executive branch tooperate the current system of money we have today.”(http://www.house.gov/paul/congrec/congrec2003/cr090503.htm)If inflation continues then you can reach even higher levels called hyper inflation.In 2006 in Zimbabwe the inflation levels hit unprecedented levels. They had to beginprinting larger and larger denominations of dollars to keep up with the rising prices. Atone point that had gotten to the point of have multibillion dollar bills. The money wasactually worth more as a novelty sold online then as value for goods or services in thatcountry. “Ashes are all that is left of the Zimbabwe dollar — a remnant of paper money.During Zimbabwe’s hyperinflation, foreign currencies replaced the Zimbabwe dollar in arapid and spontaneous manner.” (Steve H. Hanke, the Cato Institute, June 25
2006”As inflation goes up, and the value of your currency goes down then businesses mustraise prices. These price increases typically are passed down the chain to theconsumer. In Zimbabwe prices become so extreme that a bottle of beer could cost $50billion dollars. The Federal Reserve attempts to halt inflation by manipulating themarkets and cutting off the flow of new currency. Depending on the situation though thiscan then trigger issues with the overall economy. If there is not enough inflation thengoods and services cost less for the consumer, but are not as profitable for thebusinesses.
Damon Talbot Federal Reserve & InflationComp II