The Federal Reserve's role in inflation rates

Inflation (MGN)

You might notice that the value of a dollar changes over the years.

Nothing impacts the value of your money like inflation.

Dr. Allan Jenkins with the University of Nebraska at Kearney told NTV News the federal reserve has a target inflation rate of two percent per year.

Jenkins said while it seems counterproductive to have inflation, he says inflation helps businesses as the value of their products increase.

“If Ford Motor company builds a pickup, they don't sell it the day it's built,” Jenkins said. “It sits somewhere in inventory. So if there's a little bit of inflation, what's happening to that pickup sitting in inventory? It's going up a little bit. Deflation sounds great if you're a consumer. Why can’t you have that? Think about what happens to Ford Motor company then. They build a truck, they put it out in their storage lot and while it's sitting there it's losing value.”

Senior Fellow of Economics at the Ludwig von Mises Institute Doctor Mark Thornton disagrees.

Thornton said Austrian school economists like himself define inflation as a politically motivated increase in the market supply.

Adding most economists look at effects of inflation rather than the overall cause, which has an impact on interest rates.

“They're looking at one effect of monetary inflation where Austrians look at many effects of monetary inflation, on prices on the business cycles, the redistribution of wealth from the working class to the wealthy,” Thornton said. “So that's why they're not really sure of why they're getting such good results in some areas of the economy and why they're getting such bad results in other areas of the economy. And it's why they're afraid to move forward with bolder moves in terms of normalizing interest rates.”

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