Three separate factors all can create inflation:
Increased demand for products and servicesConstraints on available supplies for goods and servicesAn increase in the amount of money being printed
The first two examples cause costs to rise, limiting how much can be purchased, while the third example devalues each dollar because there are more of them.
Tracking the Dollar’s Value
The Consumer Price Index (CPI) determines the value of the U.S. dollar by the goods and services it purchases. The CPI compares the prices of a basket of goods and services each month. As the dollar’s value falls, the cost of living increases. Exchange rates tell you how much the dollar’s value is at any given time in overseas markets. One easy way to find out the dollar’s value against most of the world’s currencies is to use the dollar index, which compares the U.S. dollar to the euro, the Japanese yen, pound sterling, the Canadian dollar, Swedish krona, and the Swiss franc.
How Much Value Has the Dollar Lost?
Hyperinflation after World War I reduced the dollar’s value by nearly half from 1913 to 1919, but the Great Depression created deflation, which occurs when prices drop while the dollar gains value. After World War II, the global economy grew, and inflation returned. Through the years, recessions initially created deflation, but inflation followed as the government spent to fight it. Using a CPI inflation calculator, we can start with $100 in 1913 and track its equivalent value in dollars in future years: Many countries that export to the United States accumulate dollars as payments. They keep these on hand as foreign currency reserves. Without these reserves, the value of the dollar today could be much lower for multiple reasons:
The dollar is the world’s reserve currency. Most international transactions are made in dollars. Foreign governments keep dollars on hand in case their businesses need it for international trade. Some countries, like China and Japan, export a lot to the U.S. Their companies receive many dollars as payment for their goods. The government exchanges those dollars for local currency. The central banks of China and Japan use the dollars to purchase U.S. Treasurys. This practice keeps the dollar’s value higher relative to their currencies. Their exports become cheaper in comparison. It gives their firms a competitive advantage.
What It Means to You
When the dollar loses value, it drives import prices higher, which is one of the reasons gas prices sometimes rise. Oil is one of our nation’s biggest imports. A declining dollar also makes trips overseas more expensive, but it helps U.S. manufacturers export because their products cost less in foreign countries. A decline in the dollar’s value eats away at your standard of living. Since the recession of 2007-2009, the rich have gotten richer. As of tax year 2018, the top 10% of earners took home almost 50% of all adjusted gross income reported on tax returns. The top 1% earned about 20% of all income.
