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by: WilliamBlake
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Inflation makes tomorrow's dollars worth less than today's. That makes borrowing more attractive to borrowers, but lending less attractive to lenders. In order to compensate, lenders raise interest rates, since (among other things) they too know that the dollars they will be repaid next month are worth less than the ones they loan out today.

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.

But, as a borrower, there is much one can and should do when looking at the situation. After all, governments don't continually increase inflation - if they did as happened in the late 1970s, for example, interest rates would eventually reach a point where there are loud demands to 'do something'.

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

Deflation has as much affect on everyone as inflation. It means lower interest rates. So borrowing money is more appealing. But now the money you borrow will be of less value than it will be in the future. Your loss is that as you are paying on the loan the money you are giving up would be worth more if you could save or invest it.

So the key is the try to determine which way things are going to go inflation or deflation. Many professional have hard time making such predictions. So how can the average person know what to expect?

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.

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