“Inflation actually causes people not to spend”… could it be true?
Inflation can go up for a number of reasons. Boom times can cause inflation, as everyone is making and spending a lot of money, so prices and inflation goes up. In times like these central banks usually increase interest rates to curb spending and thus bring down inflation. By raising interest rates the central bank is increasing the cost of borrowing money. So with high prices and a higher cost to borrowing money, most people start reducing their spending. When this happens businesses sell less stock and have increased costs (due to higher interest rates) so have to lay off staff or reduce their hours at work, so people will have even less money to spend. This causes prices to fall and reduces inflation and can result in a recession. At this point in time central banks start reducing interest rates to make the cost of borrowing money cheaper and stimulate people to start spending again. And so the cycle continues. The result in this case is that inflation itself didn't kerb demand, but was helped along by the central bank rising interest rates. Another reason causing inflation can be a restriction on the supply of certain goods or services. An example we went through about 2 years ago was when floods caused banana crops up in Northern Australia to be devastated. This caused a lack of supply in bananas for almost a year across Australia. The normal price for bananas here is between $1 to $3 per kg. During this period banana prices skyrocketed up to $14 per kg. The result: very few were buying bananas. So the increase in price here caused a reduction in demand directly. Not always. You always consider economic factors in conjunction with each other rather than in isolation, which leads to weird assumptions. People spending isn't what you should look at always. When inflation is high, means government is spending. Government is spending on public projects, creating employment, increasing salaries, doling out loans. So you are putting money into the economy and into people's hands. Everybody will be spending, so it will also drive demand(Demand Pull inflation). But there are differences among economists regarding Cost push inflation, which is a dangerous phenomena. At the same time the interest rates, which are a monetary tool for central banks to increase(decrease) the money flow in the economy, are low. Under low interest rate conditions, businesses take loans to invest in projects. Because interest rates are low, people find it logical to spend now than spend later. As interest rates are low, there is an expectation that they cannot earn more in savings than investing in products which will generate benefits in the near term. These all goes on in cycles and after a period of inflation, you will see government taking action to rein in inflation. It will increase interest rates to suck money out of the economy. This is when people will curb spending, because they know they will earn a higher return while saving rather than investing. We need to be careful what we are talking about here. Inflation on a economy-level scale at an expected rate will not change consumer habits because the price increase is manageable. You have to realize that prices are not increasing in isolation: wages will have to rise along too.  High inflation that is expected will increase consumption of durable goods, as people attempt to 'get rid of their money' before the price changes on them. A good example of this was post-WWI germany, where hyperinflation was so bad that offices began to pay their employees twice daily, so they could adjust their wages, and so that their employees could go out during lunch and after work to buy something with the money before the price changed on them. Unexpected inflation may cause a temporary dip in spending until wages adjust, however consumers still need to buy, so they will likely push for higher wages, leading to consumption to stay about level. There is another effect to inflation as well: People who have savings will have their savings eroded over time if the economy is inflationary. To preserve their wealth, they will invest it. In a deflationary environment, money will increase in value simply by being hoarded, so they will be less willing to invest it. Deflation also increases the cost of interest on a loan, while inflation decreases it. So the overall effect is for an increase in spending under inflation, and a decrease under deflation. The person you have quoted is quite wrong. Price increases in a particular sector will cause consumer spending to decrease but this is a bad example, as it is not inflation, but rather a supply/demand problem of a particular consumer good. They are applying a micro-economic model (price increases of a single good) to a macroeconomic problem (price increases in the entire economy) when price increases at a global scale have the opposite effects. A good theoretical test of this is: what would happen if everyone in the US suddenly had twice as much money? (Ignoring international trade, of course). The answer: prices will double, and nothing else will change. The reason is, people will have more money to spend, but will require more money for their services, so in the end it all cancels out.
There is a thing called the consumer price index (CPI) There is a basket of goods that the people who keep the index basically shop for.  It is much more detailed for the sake of accuracy, but bottom line is they shop for the same stuff each year.  They measure the difference from year to year and that gives you a pretty good idea of inflation from a regular person point of view. http://www.inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx But it isn't without its faults, people bicker about the methodology and what constitutes the index. http://www.investopedia.com/articles/07/consumerpriceindex.asp?viewed=1 I've been hearing storied from Germans that this is happening in Germany, too, but at the bank level. All anecdotal, people I've met telling me their personal stories, but they follow the same pattern. Go to the bank, try to take out a few grand for a vacation or large purchase, bank tells them they can't have that much and that they just have to do with less, even if the account balance covers the withdrawal. You can't really avoid inflation. As the population grows, the amount of money needed will grow as well (because the people will grow up and go to work and earn money, and someone has to create it to pay them). One of the definitions of inflation is increasing amount of money. Increasing amount of money causes devaluation (for example, if instead of 1000 dollars we now have 2000 dollars in circulation, because the population tripled in the last 50 years, while in Russia the population remained the same and they have the same 1000 rubles as they had 50 years ago - 1 ruble will no longer cost 1 dollar, but rather 2, i.e.: prices rise). This is very simplified of course, and there are a lot of causes and triggers for inflation. Inflation, when controlled and within certain limits is necessary for growth, as mentioned, but when uncontrolled and very high it causes a lot of damage, and that's what troubles people about inflation, not its mere existence. As to bringing the prices down- the prices don't go down, the  gallon of gas will not go back to $0.25. It's just the buying power of the money goes down, because of inflation. You could buy a gallon of gas for 0.25 50 years ago, but you had to work for 1/2 hour to earn these 0.25. Now you have to pay $4, but if you still need to work for 1/2 hour for that, then the price didn't rise, effectively. Hyperinflation doesn't mean armaggedon. There have been hundreds of fiat currencies that have ended in hyperinflation i.e. wiemar republic (which the germans fully recovered from in less than 10 years before trying to take over europe).   Most all pawn shops buy gold/silver, especially during hyperinflation will people be buying gold/silver. You can't have hyperinflation without demand of commodities going through the roof, that is the driver of inflation. When this happens you can be gauranteed people will buy your gold/silver.  In the Wiemar republic, some people bought gold/silver for 1/10,000,000 what they sold it for. But they still lost 99% of their value because the mark still devalued another 1,000,000 times. Because of this, many people aren't even looking to sell it, until they absolutely need it's value. I.e. it's a piggy bank.   The best way to deal with a gold/silver stash is to hide it, you can't steal what you can't find. There's a reason pirates are famous for burying their stuff, when they don't have the law on their side. "Sensitive topic ;) Inflation is a consequence of the mismatch between supply and demand.  In an ideal world the amount of goods available would exactly match the demand for those goods.   We don't live in an ideal world. One example of oversupply is dollar stores where you can buy remainders from companies that misjudged demand.  Most recently we've seen wheat prices rise as fires outside Moscow damaged the harvest and the Russian government banned exports. And that introduces the danger of inflation. Inflation is a signal, like the pain you feel after an injury.  If you simply took a painkiller you may completely ignore a broken leg until gangrene took your life. Governments sometimes ""ban"" inflation by fixing prices.  Both the Zimbabwean and Venezuelan governments have tried this recently.  The consequence of that is goods become unavailable as producers refuse to create supply for less than the cost of production. As CrimonsX pointed out, governments do desperately want to avoid deflation as much as they want to avoid hyperinflation. There is a ""correct"" level and that has resulted in the monetary policy called ""Inflation targetting"" where central banks attempt to manage inflation into a target range (usually around 2% to 6%). The reason is simply that limited inflation drives investment and consumption.  With a guaranteed return on investment people with cash will lend it to people with ideas.  Consumers will buy goods today if they fear that the price will rise tomorrow. If prices fall (as they have done during the two decades of deflation in Japan) then the result is lower levels of investment and employment as companies cut production capacity.  If prices rise to quickly (as in Zimbabwe and Venezuela) then people cannot save enough or earn enough and so their wealth is drained away. Add to this the continual process of innovation and you see how difficult it is to manage inflation at all.  Innovation can result in increased efficiency which can reduce prices.  It can also result in a new product which is sufficiently unique to allow predatory pricing (the Apple iPhone, new types of medicines, and so on). The best mechanism we have for figuring out where money should be invested and who is the best recipient of any good is the price mechanism.  Inflation is the signal that investors need to learn how best to manage their efforts. We hide from it at our peril." "People are naturally pessimistic or optimistic. I am a pessimist, I have a anxiety disorder to prove. Tried to have a business, gave up when I realized I would have to borrow more money to keep on going. My dad on the other hand, he is eternal optimist. He was part of the 80es real estate bubble. It just was in his genes to believe that prizes keep on going up. And they might have, but there were factors at play that he could not foresee (falling of soviet union which influenced Finland).   To me, bubbles are born because of 1 simple reason. Government backed loans. If governments would not bail out banks that lend money to speculators. There would not be bubbles. It is that simple. But then the economy would freeze, since banks would demand perfect guarantees before they would loan you a cent.  One way to deal with that might be that central banks would naturally print money at a certain rate each year, knowing that a lot of that money will just burn in bad investments, basically forgiving banks for the bad loans they have made. Not too much to cause inflation, yet not too little to cause banks stop lending.  This money would be simply printed off thin air.   There would have to be a agreement on IMF level at what this ""burn rate"" could be to invidual countries. But since that burn rate could give an edge to a country that was allowed to print more, it would be very hard to come to an agreement how much each country could print.   Or, there could be a international agreement that the money would printed this way only during recessions.   Else we are stuck with bust and boom cycles, which are very destructive as I have witnessed first hand." "No, it isn't generally believed that inflation is caused by individual banks printing money.  Governments manage money supply through Central Banks (which may, or may not, be independent of the state). There are a number of theories about money supply and inflation (from Monetarist, to Keynesian, and so on). The Quantity Theory of Inflation says that long-term inflation is the result of money-supply but short-term inflation is related to events/local conditions. Short-term inflation is a symptom of economic change.  It's like a cough for a doctor.  It simply indicates an underlying event. When prices go up it encourages new producers to enter the market, create new supply which will then act to lower prices.  In this way inflation is managed by ensuring that information travels throughout the economy.  If prices go up for specific goods, then - all things being equal - supply should go up since the increase implies increasing demand.  If prices go down then this implies demand has gone down and so producers will reduce supply. Obviously this isn't a perfect relationship.  There is ""stickiness"" which can be caused by a whole bunch of market conditions (from banning of short-selling, to inelasticity of demand/supply). Your question isn't about quantitative easing (which is a state-led way of increasing money-supply and which could increase inflation but is hoped to increase expenditure and investment) so I won't cover that here. The important take-away is that inflation is an essential price signal to investors and business people so that they can assess market cycles.  Without it we would end up with vast over- or under-supply and much greater economic disruption." What you say about monetary velocity is true, but I don't think its the whole story. Banks also create money by lending out their deposits: if I put $1000 in my account, and the bank lends out $500 of it, I still have my $1000 on deposit but someone else is also spending an extra $500. If the banks are lending less then this effect is reduced and the volume of money reduces as well as its velocity. Preparations for inflation that is not going to happen anytime soon is preventing much needed currency from being injected into the system.  The deflationary pressures are so strong that less and less currency is being circulated, as people fear for the future.  They save more and spend less, because their neighbor's out of work, and they might be next (if they are lucky enough to still have a job).  That's not to mention that huge mortgage that they bought into, and are now massively underwater with.  With that, they are constantly removing chunks of currency from circulation.  When everyone is taking chunks out, the demand for currency rises, and demand for goods and services dies, creating an ever deepening hole.  So yes, I think the government should be making major purchases, damn the deficit.  Fiber to everyone's home, absolutely massive funding of clean energy research and projects, combat infrastructure decay, etc etc.  Labor and resources are cheap right now, and leaving all these people with stagnating skill sets by the wayside with no options creates an exponential decrease in productivity.  We have the methods to control inflation when and if it rears it head.. high taxation and high interest rates.  Let's burn that bridge when we get there.  The U.S. budget does not work like a household, as alluring as this analogy is.  There is no paying back the deficit, and there will never be a problem paying the interest on a a currency we can make more of at any point.  The real limitation here is inflation, and we have none. I've seen a lot of long and complicated answers here so here is my simple and short answer: Let's say the economy consists of: 10 apples and 10$. Then an apple costs 1$. If you print 10$ more you have: 10 apples and 20$. Then an apple costs 2$. That is it! It's not what Kenshin said:  Over time, prices go up! However I would like to add something more on the topic: inflation is theft! If I hack the bank and steal 10% from each account it's obvious that it is theft. It's a bit less obvious when the government prints out money and people loose 10% of the value in their bank accounts but the end result is the same. Final note: some may disagree but I do not consider inflation when 5 of the apples rot and you have: 5 apples and 10$ and an apple now costs 2$. This is a drop in supply and if the demand stays the same prices will rise. "Two typical responses to articles/surveys making such claims:  **1. People use other forms of asset for emergency savings because interest rates are low - clearly false.**  **2. People use other forms of saving than a saving account therefore such surveys as the X% can't handle a $500 emergency are wrong on their face - this is false the vast majority use a savings account.**  I've chosen a topic that absolutely annoys the shit out of me every time it comes up, how people save their money. Every time this topic comes up about X% of americans can't come up with $Y dollars in an emergency or have less than $Z in savings someone inevitably chimes in with the linked response. I have *never* seen anyone attempt to source their hand waving response beyond their own anecdote, which is usually a thinly veiled brag about how financially savvy they are with their wealth. Perhaps people who have no assets, or crippling debt don't go out of their way to brag about it...  I could link multiple reddit posts making a similar response, which I address with my own stock response about once every 1-2 months. Instead I've decided to expand with data from several other sources. This is the prototypical good/bad research problem. If you're asserting something, but qualify your statement with, ""I""m sure we'd find...if we looked into..."" then you're doing it wrong. A good researcher or journalist doesn't put bullshit like that in their work because it's their job to actually look for sources of data; data which should exist with multiple government and independent groups. So let's get started (all data as recent as I could find, oldest source is for 2010):  * [Most americans don't invest in the stock market](https://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf)  About 48.8% of americans owned publicly traded stock directly or indirectly, with a much smaller percent (13.8%) owning stock directly -  pages 18 and 16 respectively. It's important to note the predominance of indirect ownership which suggests this is mostly retirement accounts. It's entirely possible people are irresponsible with their emergency savings, but I think it safe to say we should not expect people to *dip into their retirement accounts* for relatively minor emergency expenses. The reason is obvious, even if it covers the expense they now have to make up the shortfall for their retirement savings. This is further supported by the same source:  &gt;""The value of assets held within IRAs and DC plans are among the most significant compo-nents of many families’ balance sheets and are a significant determinant of their future retirement security.""  Ibid (page 20, PDF page 20 of 41)  There is also a break down of holdings by asset type on page 16, PDF page 16 of 41.  * [This data is skewed by the top 10% who keep more of their wealth in different asset types.](http://www2.ucsc.edu/whorulesamerica/power/wealth.html) For a breakdown between the 1st, 10th, and 90th percentiles see **table 3.**  So far it seems pretty hard to maintain a large percent of americans have their wealth stored outside of savings accounts, mattresses aside.  * [Here's my original reply as to the breakdown of americans assets by type and percent holding.](https://imgur.com/a/DsLxB) Note this assumes people *have* assets. [Source for images/data.](https://www.census.gov/people/wealth/data/dtables.html)  Most people use savings accounts, with runner up falling to checking accounts. This will segue into our next topic which is the problem of unbanked/underbanked households.  * [A large number of individuals have no assets; breaking down by asset types assumes people *have* assets in the first place.](https://www.fdic.gov/householdsurvey/)  To quote the FDIC:  &gt;*""Estimates from the 2015 survey indicate that 7.0 percent of households in the United States were unbanked in 2015. This proportion represents approximately 9.0 million households. An additional 19.9 percent of U.S. households (24.5 million) were underbanked, meaning that the household had a checking or savings account but also obtained financial products and services outside of the banking system.""*  That's right there are millions of households *so finance savvy* they don't even have bank accounts! Obviously it's because of low interest rates. Also, most people have a checking account as well as savings account, the percent with ""checking and savings"" was 75.8% while those with ""checking only"" were 22.2% (page 25, PDF page 31 of 88). It's possible in some surveys people keep all their money in checking, but given other data sources, and the original claim this fails to hold up. If the concern was interest rates it makes no sense to keep money in checking which seldom pays interest.  This survey also directly addresses the issue of ""emergency savings"":  &gt; *""Overall, 56.3 percent of households saved for unexpected  expenses or emergencies in the past 12 months.""* (page 37, PDF page 43 of 88)  Furthermore:  &gt;*""Figure 7.2 shows that among all households that saved for  unexpected expenses or emergencies, savings accounts  were the most used savings method followed by checking  accounts:* **more than four in five (84.9 percent) kept savings  in one of these accounts.** *About one in ten (10.5 percent)  households that saved maintained savings in the home, or  with family or friends.""*   Emphasis added.  * [Why don't people have wealth in different asset classes? Well they don't save money.](http://cdn.financialsamurai.com/wp-content/uploads/2014/06/savings-rates-by-wealth-class.png)  This is further supported by the OECD data:  * [Americans ""currency and deposits"" are 13% vs 5.8% for ""securities and other shares"" as % of total financial assets.](https://data.oecd.org/hha/household-financial-assets.htm)  Additionally:  * [Interest earning checking accounts: 44.6% of american households (second image)](https://imgur.com/a/DsLxB)  * [""Among all households that saved for unexpected expenses or emergencies, savings accounts were the most used  savings method followed by checking accounts..."" (page 7, PDF page 13 of 88)](https://www.fdic.gov/householdsurvey/2015/2015report.pdf)  * ~70% saved for an emergency with a savings account vs ~24% who used checking. *Ibid.*  In fairness the FDIC link does state *banked* americans were more likely to hold checking accounts than savings accounts (98% vs ~77% respectively) but that doesn't mean they're earning interest in their checking account. It's also worth noting median transaction account value was for 2013 (this is the federal reserve data) $4100." "I disagree, the article is clear that it isn't necessarily the fault of the individual, or their spending habits.  &gt; Certainly we can all do the hard work of cutting back on our expenses, says Tescher. But she says the results of this study show something more structural than individual spending.  &gt; ""People are spending a shockingly large amount of income on housing. They have to pay for transportation to get to a job. These costs are going up while their wages stay the same.""" "There are several causes of inflation. One is called cost push — that is, if the price of e.g. oil goes up sharply (as it did in the 1970s), it creates inflation by making everything cost more. Another is called demand pull: if labor unions bargain for higher wages (as they did in the 1960s), their wage costs push up prices, especially after they start buying. The kind of inflation that the banks cause is monetary inflation. That is, for every dollar of deposits, they can make $5 or $10 of loans. So even though they don't ""print"" money (the Fed does) it's as if they did. The result could be the kind of inflation called ""too much money chasing too few goods.""" I believe there are two ways new money is created: My favorite description of this (money creation) comes from Chris Martenson: the video is here on Youtube. And yes, I believe both can create inflation. In fact this is what happened in the US between 2004 and 2007: increasing loans to households to buy houses created an inflation of home prices. "It's not possible to determine whether you can ""expect a refund"" or whether you are claiming the right number of exemptions from the information given.   If your wife were not working and you did not do independent contracting, then the answer would be much simpler.  However, in this case, we must also factor in how much your contracting brings in (since you must pay income tax on that, as well as Medicare and, probably, Social Security), whether you are filing jointly or separately, and your wife's income from her business.   There are also other factors such as whether you'll be claiming certain child care expenses, and certain tax credits which may phase out depending on your income.   If you can accurately estimate your total household income for the year, and separate that into income from wages, contracting, and your wife's business, as well as your expenses for things like state and local income and property taxes, then you can make a very reasonable estimate about your total tax burden (including the self-employment taxes on your non-wage income) and then determine whether you are having enough tax withheld from your paycheck.  Some people may find that they should have additional tax withheld to compensate for these expenses (see IRS W-4 Line #6)."