The Story of the Federal Reserve System Part 4: Inflation

Last weeks Friday Funnies looked at the balancing act that the Federal Reserve performs. This week’s comic examines the negative consequences of inflation.

I got a 3% raise, but prices are up 8%, so I'm worse off now than I was before. I guess I'll have to eat out less often or cut back on how much clothing I buy.
Inflation has many bad effects. One is that some people’s incomes don’t go up as fast as prices, so inflation reduces their purchasing power – what they can afford to buy.

I can barely remember the last time inflation was a real issue in the United States to be concerned about. I know that I would have a hard time adjusting to inflation if it suddenly went up, and I’m sure younger folks would have no experience responding to a substantial increase in inflation.

Our costs are way up, and if we raise our prices enough to cover them, our sales may suffer. Lumber and steel prices have risen, but our customers may not be prepared to pay higher construction fees. They may postpone building until prices settle down.
By making it hard for businesses to plan, inflation also can lead to uncertainty and instability in the economy.

Most businesses that exist today did not exist during the high inflation periods of the 1970s and 1980s. While the demand shock of the pandemic has caused many businesses to learn to be more adaptive, I’m still not really sure it is similar enough to a sudden inflation increase.

The uncertainty that inflation causes can lead businesses to cut purchases of new equipment and buildings.
The uncertainty that inflation causes can lead businesses to cut purchases of new equipment and buildings.
Last year, when inflation created so much uncertainty, we stopped buying machinery and now we're having trouble keeping up with our orders.
The drop in business investment, in turn, can hurt the economy’s ability to produce in the future.

Next week we’ll cover the tools that the Federal Reserve can use to address inflation. Feel free to share your thoughts and questions in the comments section below.

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