You may have heard your parents or relatives complain about how the price of goods was lower back in the old days. This is only true to the extent that inflation has not been factored in. Inflation is the general increase in the price level. This alters the worth of a good. Currently, the price of $1 in 1900 has risen to a staggering $34 in 2022. Inflation in the US has recently hit a 40-year high of 8% following the recovery from the pandemic. In efforts to boost economic growth in 2020, the Federal Reserve decreased interest rates, which led to slight increases in inflation in the months progressing. Since 2012, the Federal Reserve has aimed to keep inflation between 2%. However, the relative worth of the dollar is still expected to fall. Inflation is not a new concept, with many countries experiencing this problem previously. Notably, China suffered from hyperinflation in the 14th century, as did Weimar Germany following the end of WW1. Inflation has led to the collapse of several economies, and keeping it under control is crucial.
The gold standard
Why has the dollar only increased now? Back in 1898, the US used the gold standard in which the dollar had a value directly linked to gold. The gold standard kept inflation to a minimum since gold was viewed to maintain its worth regardless of time, trends, and other factors. Even if the economy was collapsing, people could trade the dollar for gold, giving them a sense of security. However, the gold standard is currently not in use by any government. The US abandoned it back in 1933, as did other countries. Despite its benefits, there are several reasons to justify this. For one, the government wanted the ability to adjust the currency so that it could boost economic growth in times of recessions. Furthermore, too much dependency on the power of gold to do well is also not ideal if gold eventually loses its worth
Factors affecting inflation
overtime, what are the main reasons why the value of a dollar has decreased? One of the reasons is that as the economy is operating towards total capacity, there is more money around, but the number of goods is roughly the same. Since it is harder to produce more at full capacity, it causes the dollar's worth decreases. In addition to this, the average consumer spending has been increasing. The ‘basket of goods is referred to a fixed set of consumer products and services. As people adjust their mindset to the current living standards, the costs of living will be higher. For example, many benefits such as internet access were not available before, so the services we now depend on for almost everything have to be factored into the basket of goods. One thing to note is that inflation is dependable on what people are buying; inflation may rise higher in some sectors such as real estate and lower in others. Goods such as oil may lead to changes in the value of a currency, as when finite sources are slowly being used up, oil prices will increase.
Since implementing the 2% inflation target, the economy has grown at a healthy rate. The dollar is the world's reserve currency, and almost all of the countries in the world depend on the dollar to do well as many of their currencies are tied to it. The main stakeholders impacted by this are the consumers since money now has less worth. On the other hand, this will benefit the government as the US currently is in a lot of debt, and inflation makes it easier for the government to repay them.