- February 2011: Vol. 23 No. 2

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Time to Adjust the Game Plan: “New” Inflation Requires Different Approach

by Ethan Penner

Inflation is a complex matter that is broadly misunderstood. We commonly associate inflation with higher interest rates. In most recent inflationary periods, the inflation resulted from an overheated economy with low unemployment that created pressure for wage increases and general price increases. In reality, inflation is simply the destruction of the purchasing power of a currency. This destruction can be achieved through increasing interest rates, but this is by no means the only method.

Today we face a risk of inflation that seems markedly different from those in the recent past. With unemployment rates at nearly 10 percent (not even counting those who have given up chasing a job) and job creation seemingly anemic, there is no employment pressure building and none that seems imminent. Consumer balance sheets, which were largely dependent upon home values, remain very weak, with massive lingering indebtedness, resulting in a very unsettled employment environment. Interest

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