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What is Inflation?

January 11, 2011 Leave a comment

Inflation is the process in which the purchasing power of money isĀ  reduced. The impact of debt is reduced during an inflationary period because wages rise making the debt easier to repay. Interest rates on debt rarely keep pace. Governments can fuel inflation by making money more available. This is done either by increasing the money supply – like the ‘Q.E. -quantitative easing of the U.S. – ie the printing of money by the European central bank or by reducing interest rates.
Inflation is most commonly measured using the Consumer price Index or CPI. The figures of course are easily manipulated by Government.
My definition of Inflation is an expansion of the currency supply. The chief symptom of inflation is rising prices. More Euros or Dollars in circulation reduces or dilutes the value of all the others in circulation. The inherent value of a consumer commodity remains the same it just takes more currency to but it up.
The way to beat inflation is to see through it. The price of Gold or Silver in Euro is irrelevant. What can the ounce of metal buy? The recent huge rise in the value of precious metals only reflects the loss of value of our fiat currencies.

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