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INFLATION
Simply stated, inflation is a continuing rise in prices for goods and services. The higher the rate of inflation, the faster prices go up.

One danger of inflation is that, unless accompanied by a comparable rise in wages, it lowers a family's standard of living. Inflation particularly hurts people living on fixed incomes — the elderly and those who depend on government-sponsored social programs, such as social security and veterans' benefits.

A high rate of inflation also induces people to buy on credit and to forgo saving money. The economy suffers when individuals do not save money, because banks have less money to loan for investments in new homes, business and industrial equipment.

The government can control inflation through a variety of means. For example, the president can order wage controls, thereby reducing the amount of money available for spending. When there is less demand for goods and services, prices eventually fall to acceptable levels. Another way the government controls inflation is through the Federal Reserve Board (the Fed), which determines the amount of money circulating in the economy. The Fed can reduce — or tighten — the money supply by raising interest rates (the price one must pay to borrow money). When interest rates rise, consumer spending decreases and prices fall.