Inflation results in the decrease of the value of the dollar. That means that in the financing market, borrowers are more inclined to borrow money, but lenders are less inclined to make loans. A lender knows that the money he is paid back over time will be of less value than what he loans. To make up for their loss, lenders raise interest rates.



Higher interest rates means higher prices and people find themselves needing to borrow money to accomplish things they need to do, like improvements on their home or purchasing a car. Just like with anything, the higher demand for an item the higher the price is. So a high demand for money means the price of it, or the interest rate, will go up.

Individuals have little or no control over inflation. It is caused by the government, its borrowing habits or use of funds. It is also affected by how much currency or credit the government issues. Being knowledgeable about the causes and advocating sound policies is the only recourse people have.

Fortunately governments are not increasing inflation at a steady rate so they are not constantly on the rise. If they were interest rates would reach an unimaginable rate as they did back in the 70's. So borrowers need to keep an eye on the situation and act accordingly.

When they 'do something' it invariably means closing down the spigot, this is reversing or at least slowing the actions listed above.

Those actions have a definite impact on anyone looking to borrow money, just as the inflation did. That deflation may lower rates, encouraging more borrowing, but it also causes dollars borrowed today to be worth less than they would be tomorrow. So you are repaying a loan with dollars that are worth more tomorrow if you held onto them (by saving or investing) than they are today.

So, when you consider borrowing you have to try to make a guess - just as the banks do - about which way inflationary or deflationary pressures are likely to go. That's a tough job for even professional economists, so how can a laymen be expected to do that with any rationality?

While there's no sure method, there are some indicators that are available to anyone. It used to be that gold and silver were good indicators, but that is no longer true since the dollar is no longer related to any hard commodity. Still, there are one or two that can be helpful.