Whip Inflation Now, Before It Whips You

We've all been so focused on whether we are officially in a recession that we may not have paid enough attention to the creeping threat of inflation.

But a period of rising prices is equally threatening to your financial well-being.

The Federal Reserve recently decided to keep its target for the federal funds rate at 2 percent, partly because of concerns about inflation.

"Uncertainty about the inflation outlook remains high," the Federal Open Market Committee, which sets the funds rate, said in a statement in announcing its rate decision. "The upside risks to inflation and inflation expectations have increased."

Simply put, inflation erodes the purchasing power of your dollar.

Talk to anyone who had to pay for gas, groceries or any consumer goods in the 1970s and they'll tell you how hard inflation can be.

I remember those days. I recall my grandmother piling us in the car before dawn to get in line to buy gas. At one point, in many areas, you could only buy gas on odd or even days of the month. Which day you could buy gas depended on the last digit of your license plate.

Federal Reserve Chairman Ben S. Bernanke also remembers that time, as he recounted in a commencement speech at Harvard University in early June.

"Then, as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth," Bernanke said.

The economy had just gone through a severe recession, during which output, income and employment fell sharply and unemployment rose to 9 percent, Bernanke told the graduates. Consumer price inflation, which had been around 3 to 4 percent earlier in the decade, climbed to more than 10 percent.

Bernanke doesn't think we're headed for a similar slide into a '70s-style economic crisis. The overall inflation rate has averaged about 3 1/2 percent over the past four quarters. Inflation is significantly higher than he would like but not as disturbing as in the mid-1970s.

"I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities," he said. "Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges."