Inflation

I took my suit to the dry cleaners to be cleaned. The cost had gone up 17% from just a couple months ago. I expect prices to go up, but 17%? In two months? Okay, so it had been awhile since prices were raised – a year, maybe two years. And the owner’s costs are going up.

Salary is probably the owner’s largest expense. Do the employees make a fair wage? Is it less than the $15 per hour that workers are looking for as a minimum? Maybe the owner decided to raise employees’ minimum wage to $15. If I go to a less expensive competitor, are the competitor’s employees earning less?

The United States government pays a lot of attention to inflation. The annual rate of inflation in the United Sates has been between one and three percent in recent years. The general consensus is that some inflation is good. If inflation is low or non-existent, people may put off making purchases – the cost next month or next year will be about the same. But less demand means fewer jobs, more unemployment, and a downward spiral over time. Deflation, that is, falling prices, is even worse. If dollars are going to buy more in the future, people stash those dollars away, and consumption drops off a cliff, except for necessities like food. And as prices fall, wages fall, for those still employed.

So a little inflation is good for economic growth. While the value of dollars goes down, more dollars are spent, more money is in circulation, wages tend to go up, and, for borrowers, their debts may be easier to repay.

After experiencing the fallout from the Great Recession, the Federal Reserve Bank in the U.S. set a target goal for inflation. At its January 2012 meeting the Federal Open Market Committee (FOMC), confirmed its commitment “to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates.” By clearly stating its intentions, the FOMC intended to foster price stability through accountability and transparency. In its statement, the FOMC “judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.”

So although my dry cleaner’s price increase is well north of the Federal Reserve target for inflation, and that increase will contribute marginally to the price index, I decided the owner may have valid reason for the increase. I’ll remain a customer.