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On any given day, the business news organizations report that Alan Greenspan testified in front of a Senate committee about inflation and the economy.  Normally, you might not care about Senate hearings and molasses-slow government activities.  But Alan Greenspan affects our lives more than many politicians.  Who is he and why should we care about what he says?

Alan Greenspan is the chairman of the Federal Reserve Board, usually referred to as the “Fed.”  The Fed controls the flow of money (cash) in the United States by varying the interest rates they charge banks.  Banks borrow cash from the Fed to supply money for everything from our car loans and mortgages to ATMs.   In the last 12 months the Feds have raised this interest rate eight times.  But what does that mean to you and me?

What’s the Fuss About Inflation?

The total amount of cash that we spend affects the prices of goods (e.g. groceries, clothes, cars).  The more money we spend, the higher the prices go (what business would refuse to sell us something?), the higher our salary demands, the more businesses have to charge for their goods and services, and so on and so on.  This is inflation. And Alan Greenspan and the Fed try to control inflation by raising the interest rates.  Let’s look at one measure of inflation.

The most widely accepted measure of inflation is the CONSUMER PRICE INDEX (CPI), an indicator of price changes and the purchasing power of the consumer dollar.  If prices increase, the purchasing power of the dollar decreases.  Inflation is when the purchasing power of the dollar decreases and we, the consumers, expect that it will continue to decrease.

Available in different versions by region and adjusted for seasons, the CPI measures prices paid for certain products and services at different points in time:

While the monthly report may not make your reading list, the next time you’re budgeting, planning a major vacation, relocating or negotiating a salary increase it could help you paint a more realistic picture. For example, suppose you’ve been offered a job transfer to San Francisco from Atlanta.  You might want to compare the southern region CPI to the western region CPI to get a more realistic picture of how well your dollar can support your lifestyle in the new city. You can’t change it, but the knowledge will be helpful in planning your move and subsequent living expenses.

When Mr. Greenspan Speaks…

The Fed meets on August 22nd and will discuss the economy and the possibility of raising interest rates.  Based on Alan Greenspan’s remarks to Congress this week, the economy is “under control.”  But if conditions change, expect changes in the interest rates and a stock market reaction to this possibility.   So, next time you hear “Alan Greenspan” on the radio, remember he’s talking about your money.