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Why Should I Care: Inflation


Like shooting finance in a barrel.

So you're on a date with that girl you picked up at Dave & Buster's last week. You know, the one whose errant skee-ball shots sent hordes of yuppies scurrying for cover under a hail of wooden orbs.

She graciously accepted that stuffed moose you gave her -- the net result of a night's worth of hard-won tickets -- and agreed to have dinner the following Friday.

Fast forward to a dimly lit Asian fusion restaurant called "romantic" and "hip."

You peruse the menu; she sucks back Cosmopolitans like it's season two of Sex and the City. The meal itself is a blur, a forgettable mix of bastardized Pan-Asian swill heavy on the rice.

Finally, the waiter hands you the check and your companion vaguely gestures toward her Coach (COH) purse in the emptiest of all first date gestures: the fake reach.

"I've got it," you tell her, sliding the tab across the table toward your sphere of influence. You skip over the line items right to the final tally: $109. $109 dollars for three Cosmopolitans for Carrie Bradshaw over there, two Heinekens for you, trace amounts of protein and, well, rice. You're intimate with the standard markup on booze, but since when did restaurants start making their margins on short grain and jasmine?

Those aren't margins; that's inflation.

And it isn't just Pacific Rim-inspired dishes. It's everything from milk to gas to electricity to those little frozen burritos that used to come in packs of 10 for, like, 80 cents.

So why are prices going up in such dramatic fashion now? It's not like we woke up after a night of drinking and China and India suddenly had a couple billion mouths to feed.

Globalization has ratcheted up the demand for stuff, but the means to produce that stuff hasn't kept up. As a result, food, steel, fuel -- just about everything it takes to feed, shelter and transport people – is harder to come by. The first day of Economics 101 teaches the principle of supply and demand: The less there is of something, the more it costs to obtain.

Take rice. Recent population booms in Asia and Latin America have increased worldwide consumption without stepping up production.

Couple that with the price of transportation (it doesn't get there by sack-dragging mules alone). Trucks and airplanes guzzle increasingly expensive fuel faster than your Escalade (GM). Don't think for a second you're not footing that bill, too.

If only it were that simple.

As you may have noticed, your purchasing power has also taken a dramatic hit: Your hard-earned dollars seem more Monopoly money than Euro.

To combat the credit crunch that first reared its ugly head last summer, the Federal Reserve slashed interest rates, hoping to jumpstart the ailing economy with cheap money.

But lower rates mean holders of U.S. debt earn less on the money they sock away with our dear friends at the Treasury Department. The lower the return, the less inclined investors are to keep greenbacks in their portfolios (if you had an investment that wasn't performing, you'd consider cutting your losses, too). Lower demand begets lower value.

And, as the dollar's value falls, consumers and businesses need more of them to buy those increasingly expensive goods from overseas. What used to cost $89 at an Asian fusion joint that purports to be "romantic" and "hip" now sets you back $109.

Look on the bright side: The economy is resilient and has weathered worse. Things are bound to get better. Until they do, there's limited shame and a touch of hipster irony in closing the deal over all-you-can-eat breadsticks at the Olive Garden (DRI).
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No positions in stocks mentioned.

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