I've heard that inflation doesn't actually 'tax' you because all nominal prices adjust so they have similar (previous) real values. If inflation increases, so d

I've heard that inflation doesn't actually 'tax' you because all nominal prices adjust so they have similar (previous) real values. If inflation increases, so do your wages, prices at stores, and interest rates (savings rate, loans rate, etc). > Think of the Fed... charging you interest on every dollar in your pocket every second of every day, without your permission or consent. Like I said before: ceteris paribus, the real value of your money remains the same. A dollar may be worth less, but that is compensated with higher interest rates, wages, etc. > At any time, the central bank has the power to increase the interest rate... Yes, and that is part of their monetary policy. HOWEVER, interest rates are used as a signal for the macro economy, not a cause. Let's say there is a sudden upward shift of the demand of money (because of a speculative bubble, for our example; a sudden explosion of investing). This shift in demand would therefore change where the supply of money intersects the demand of money. This point is higher. As I've said before, the interest rate (price level) is a response variable. With this situation, the theoretical price level would increase to where this new intersection takes place. The FED can, as a response, increase the supply of money, shifting the supply to the right, hopefully returning the intersection of the (new) demand and (new) supply curve to a level where the interest rate is constant. That way, a constant price level (might) be maintained. One aspect you've neglected to mention is the breadth of our global economy. The dollar is the global currency (or so I've heard). Let's say that our currency is weakening (becoming less valuable) compared to the euro. The Europeans would then take their money out of the market for dollars, thus decreasing the supply of dollars (a leftward supply shift). This shift would then cause our signal price level (interest rate) to increase. The change in interest rate is not our doing (partially). There is a way around inflation. If we back our currency with gold/silver/something whose value is stable and makes good commodity money, then the value of money is much more stable. However, the US won't do that.