inflation up by 2.5 %

tintin, Welcome to A2K, since this is the first time I have read your post.

There are no easy answers to your question concerning the 2.5% increase in inflation. This is because there are too many variables concerning personal income vs personal expenditures, savings rates vs consumer debt, and the impact of international economies to ours.

Your example for the increase in the cost of 1kg of potato is somewhat true relative to how our government accumulates core inflation rates based on a "basket of goods." This example however is not complete, since we must also consider other variables such as 1) the increase in wages vs the inflation rate, 2) how the consumer purchases his goods and services (cash or credit), and 3) how the consumer and our government handles financial management. When the debt load of consumers and government continues to rise without products and services to back up the debt, that's one of the primary cause of inflation. Too much money circulating in the market place with nothing but "faith" to back it up. Put another way, too much money chasing too little supply of goods and services is the primary cause of inflation.

The government measures inflation based on a common "basket of goods" approach, basically trying to lump a lot of different stuff in there and get an average rate of price change out of it.

The difficulty comes when some of those prices are changing more than others. Take fuel prices - they're definitely up significantly from only a couple of months ago. However, they're not up due to a change in monetary policy, but due to actual variations in the market (specifically, in response to a rise in the price of oil.)

On the one hand, the change in fuel prices should be reflected in the inflation figures, because fuel is a significant expense for many households. On the other hand, it shouldn't be in there, because the more that the measure of inflation is influenced by individual market variations, the less value it is as a measure of financial policy. On the gripping hand, since something like fuel cost is going to be reflected in other price gains, how the heck do you strip that OUT of the index?

Man, economics is complicated, ain't it?

Avatar, You've identified one of many problems with the inflation rate; fuel price. Regular gasoline in our area is selling for about $3.55/galllon. I'm not sure how many "poor" can afford to fill up their gas tanks for long at these prices, and I'm sure many middle-class families are feeling the sqeeze too! That doesn't explain the current inflation rate in any meaningful way to the majority of consumers.

last year (2006) the US trade deficit with China was 232 Billion $, that means the US wrote 232 Billion dollars of interest bearing IOU's to China. The US pays these debts by printing more $. The total US trade deficit to the world was near 800 billion.

$800 billion in notes, $800 billion for the war in Iraq, $800 billion deficit, ...what's another few billion more? Who's counting? Who cares?

Another thought about inflation. The federal reserve plays with short term interest rates as a means, they say, to control inflation. That's a bunch of BS propagated upon the American public. What influences inflation is overspending by both the government and consumers of future income or productive capacity. When there's more cash in the market place than there are products and services, it's a matter of basic supply and demand. Too many dollars chasing limited capacity means the costs of all goods and services will increase, because in essence, the currency becomes worth less and less.

Ever try to buy something that's in high demand with a limited supply? The cost increases, because the demand is greater than the supply.

This same principle applies to our economy as a whole. Nobody can control inflation with quarter point adjustment to interest rates when there are limited supplies of anything.