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What is inflation? In layman’s terms, it’s when your money doesn’t buy as much as it used to. Why does that happen? Sometimes price inflation is caused by a change in the normal supply/demand forces of the marketplace. For example, prices are likely to go up when:

•A natural disaster, such as a flood or drought, devastates food crops and fewer come to market;

•The cost of producing a product is increased (perhaps unions demand higher wages or costly environmental regulations are imposed) and the new higher costs are passed on to the consumer;

•The limited number of available tickets to a popular sporting or entertainment event gives rise to sidewalk scalpers.

On the demand side, it could be that:

•Government programs (Medicaid/Medicare) enhance consumers’ ability to pay for particular goods/services, thereby overwhelming the normal supply;

•Low interest rates encourage borrowing and spending for personal consumption or investment, thus increasing demand while the supply remains fairly constant.

These types of “inflation drivers” usually are short-lived—crop production returns to normal levels, the sporting event is over, interest rates eventually rise. Even when this type of inflation continues longer term, it tends to be focused on a particular area of the economy (health care, for example).

But there is another cause of inflation—and it is the subject of this report. This kind of inflation is related to the supply of money available. In essence, it occurs when too much money begins to circulate, lessening the value of money. In extreme cases (and there are notable historical examples), this “oversupply” can unleash a powerful inflationary trend called “hyperinflation.”